Guys, Why is Ernie’s ability to take risk below average? He just sold his construction business got $5mn from it, his living expenses are met by the salary. The 100K & 50K for Allison & Ernie Jr’s expenses have to be addressed by the potfolio. I am not sure why the ability to meet $150K in expenses by a $5mn portfolio is below average? Thanks,
I don’t quite understand this as well. The only “reason” I can say is that he’s got short initial time horizon of just 3 years. - sticky
I don’t have the question in front of me (or have even seen it to be honest) but the most conservative constraint in an IPS basically trumps everything else…so if the time is below average and liquidity is low and portfolio size is large i would say its an average to below average ability to accept risk just because of a short time horizon.
Schweser has confused me so far with the ability to take risk. Morning Exam 2 question 1 (Smythe), with a long time horizon (25 years) and large asset base (4 MM) with a spending requirement of 4.91%, that should be an above average ability to take risk according to the old CFAI exam. Similar to 2007 Ingram question with a spending requirement of 7.46% had an above average ability to take risk.
I got that wrong, but their exp is not 150k, is 250k+.
below average 1) Late lifecycle stage - close to retirement 2) significant cash requirements
The required spending is only 154 after income and this amounts only to 3.1 requirement and even after inflation of 2 this is still low. Schweser claims this is a substanial requirement however another question they claimed 4.5 is a low liquidity need. Plus if you look at the explanation of part D (where you determine asset allocation) to this question Schweser’s states “the ability of the Marks to tolerate risk is high but willingness is low…” It makes no sense… Schweser says nothing about late lifecycle stage when explaining below average ability they just state substainial required outflows. Seems like ability should be average. You start at average notch up one for large asset base and l-t horizon and notch down one for spending requirements, i.e. average.
foxiegroup Wrote: ------------------------------------------------------- > I got that wrong, but their exp is not 150k, is > 250k+. I purchase the schweser practice exam books from dealer and do not have username and password, can anyone please provide explanation of multiple choice questions for vol1 and vol2? Thanks.
I got this one wrong as well. Time horizon is long ( he is only 63) -> above average CF needed is only 154000 for next 3 years ( relative to size of portfolio 5M that’s small) -> above average. The funny thing is they come back on page 191 and write: “The ability of Marks to tolerate risk is high, but his willingness is low …”
I just took this yesterday (got killed on MC), but on this question, I also would have thought ‘average’…I think the ‘below average’ willingness must of been driven by his 2% loss threshold
I got the willingness correct, my mistake was with the ability which I still believe can’t be below average. I’m going to lose points on this question on D-Day, no doubt, I just hope it does not carry over to other parts of the item set.
mo34 Wrote: ------------------------------------------------------- > I got the willingness correct, my mistake was with > the ability which I still believe can’t be below > average. I’m going to lose points on this question > on D-Day, no doubt, I just hope it does not carry > over to other parts of the item set. funny, i got it correct, but i screwed up ability on CFAI 2005 test. 
mo34 yea this question is complete crap see my post above, why would they say in the other section that their ability is high… It seems clearly average to me based on above mentioned pts.
I put above average ability to take risk too, but the Schweser answer makes some sense. The fact that the portfolio has to support the daughter’s medical expenses, the son’s stipend, and the couple’s expenses (post retirement) is what bumps it to below average ability to take risk. They are depending on the portfolio to do all these things, with whatever’s leftover for the son and charity at their death not being their primary concern. So they need income and safety. I can sort of see this argument, but, my word above, if they don’t meet their return requirement in any given year, they’ve got $5 mil of principal to fall back on. Don’t we all wish we had that kind of safety cushion? Also, I found it odd that the “risk tolerance” answer space was listed before the “return objective” space. In my head, I felt that I had to answer the “return objective” question first to answer the “risk” question, and in this case I think I did and came up with a relatively low return objective (not quite the correct answer, but on the right track). But maybe the order of the answer spaces is a clue: should I be considering the risk tolerance independently of the return objective? Maybe so, but it still seems odd to me.
I think in the case of this particular question, you should really determine the return requirement in order to determine the ability to assume risk.
I’ve taken two Schweser tests so far and have bombed the risk objectives section. One ssaid something like: “I don’t want to lose more than 10% on any one investment.” To me that is moderate willingness, maybe even high willingness. Schweser argued that is is below average tolerance.
And I am not quite sure why they use just 2% as inflation… What about 5% annual inflation with Allison’s medical cost? I weghted-averaged inflation and came up with 2.8% annual inflation… Am I totally wrong? Anybody got any good insight on this?