* PM - Inv Objectives and IPS *

ok so the notes say (schweser bk 3, p 307) if willingness and ability to tolerate risk are in conflict, go with willingness when designing portfolios, BUT the secret sauce says (p 186): if willingness > ability, go with ability. Which one is it? thoughts?

If willingness > ability for risk, go with ability.

yes, always take the more conservative approach

I would second that… I think you would always go with ability… clients may think they have a high willingness to take risk…but as an analyst you are suppost to know better…

Secret Sauce says to go with the more conservative approach, and recommend counseling to resolve the conflict. However, if the person is extremely wealthy and does not rely on investment return for any income or liquidity needs, then you should use the midpoint if they have lower willingness.

Okay here’s the answer. You should go with willingness over ability unless the ability is blantantly lacking. This makes perfect sense if you think about it. So if the investor doesn’t have a pot to piss in and wants to invest 100% in Equity tranches of Manufactured Housing CDOs you cannot do this. But if the investor has a slightly high risk profile and still wants to invest in a slighly more risky portfolio…this is allowable.

Definitely always go with the most conservative, the CFAI clearly reflects that in their questions, always use lower of willingness or ability.