It is usually said that for determining risk tolerance above/below average, one of the things to look out for is the size of the asset base relative to the required cash flows from the portfolio. Is there any specific threshold or criteria by which we can conclude that the ability to take risk is below average or above average on basis of this?
I was doing one of the mocks in which asset base was $11,000,000 and required cash flows for the upcoming year was $70,000. Isn’t this a large asset base w.r.t spending need? Guideline answer mentions this as moderate asset base which will reduce the risk taking ability of the individual. Any thoughts from anyone?
There is no actual definition of large asset base.
In theory, it could be considered as large if Value of asset base > Annual spending * Time Horizon — but that is very subjective…
In the exam, u wont even have time to calculate this, so I would suggest to look for other factors that affect risk tolerance. For e.g. u could instead compare annual spending to salary income or retirement income.
I also thought the same. My intuition was modest meant ~ 2-3x times the upcoming spending requirement. Here it’s ~ 15x times. Can’t imagine how it’s modest.