Risk Tolerance-- CFA rec's

If a person states that they haven’t liked the high volatility of the markets the last few years and they don’t want their portfolio to see a shortfall portfolio loss of more than 11.5% (using 2 standard deviations) How would you classify their willingness? Below/Average/Above Average.

average - just on this information

Average… 11.5% isnt displaying complete loss aversion like someone who says they would be willing to lose no more than 2% on their porfolio.

Sounds more like below average to me - any time they mention that they dislike volatility that usually indicates a below average willingess. And honestly 11.5% for 2 st deviations doesn’t sound like a lot to me, but it was probably thrown in there to confuse things.


I was on the average answer too. WRONG- it’s below average. 11.5% doesn’t seem like a big shortfall requirement to me. 8% portfolio return 9% stnd deviation and your fine. (was trying to come up with scenarios that would be of average risk) Maybe Aimee is right and they threw it in to confuse things.

Here’s a hint that was given to me and I haven’t seen it fail yet (not that I’ve taken many tests yet): Investor statements override anything else when it comes to willingness. So, by mentioning that they dislike volatility, that’s pretty much automatically below average. FWIW, I think the shortfall requirement piece sounds more related to ability to take risk. Willingness is pretty much based on feelings and attitudes and (again, I haven’t taken many tests yet, but) I have yet to see anything with numbers that affects willingness.

You get 1 thing wrong like this in a IPS question and it waterfalls into 2 incorrect answers. Damn.

Good advice Amy. I’ll keep that in mind when going back through. In the CFA guideline answer for that one they specifically mentioned the shortfall as part as the reason. Aimee when are you going to start with the CFAI tests? My opinion is that they are waaaay waaaay better than what schweser throws at you.

I like to save them for last since I realize Schweser is just a tool for prep and I’d rather have the real questions fresh in my mind going into the exam. Unfortunately I’m falling behind schedule a bit but this weekend I’ll probably go through the 99-06 IPS questions (or as many of those as I can find), start taking the samples and mocks late next week and into the following week, and then do 2007-2009 in the last two weeks. Somewhere in there I was planning to squeeze in the rest of Schweser Vol 1 and maybe some Vol 2 questions but those will be the first to go if time runs out.

def willingness is below avg considering her statement about vol.

Anectdotally, it seems to me that CFAI tries to avoid cases that are average, but rather moves towards the extremes. Just saying, if a case seems borderline average to above or average to below, I will always go with the non-average answer. It would be telling to look through the guidline answers of past exams and see how many times average was the correct answer… Aimee - you’ve been on fire lately!

Haha, only because I stay away from the FI and derivative questions :wink: Greg Filbeck (self described CFA historian) said that in the last 19 years there has been only 1 IPS where the client’s risk tolerance was average. So, take what you will from that, but I know I will be double checking my answer if I think “average” the answer.