Hi: I am having trouble understand the suggested answer for 1 AM exam, first question, specifically regarding this guy’s ability to take risk. 3 years until retirement, 3.7 mil asset, needs portfolio to generate 3.1% of liquidity needs, strong desire to bequest, yet it suggested average ability. size of portfolio, large, relative to goal, time horizon short; 3 yrs until retirement, even if another 15-20 years in retirement; liquidity needs, 3%, I have trouble seeing how those averaged out to average ability. schwesser answer suggested 2 versions of liquidity constraint, 1 is 2-3%, another one is 1-2%, is there a definitive answer to what constitutes as low liquidity reqirement ( low enough to not affect risk tolerance)? also in the example given, can I assume that adding a bequest requirement makes the goal larger, or size of portfolio smaller?

specifying |bequest means that the portfolio should have a future value … in that case we approach it as a calc with FV = term value , PV = present size of port, pmt = annual spending, number of years to bequeathment = n ------------------------> solving then for I/Y

that makes sense. is there a definitive standard on what constitute as high return requirement and high liquidity requirement and long time horizon?

Is this 2009 exams or 2010? Also, Vol.1 or 2? Thanks

Once he hits retirement isn’t the liquidity constraint closer to 5% of the portfolio because he has lost his current income and doesn’t have a pension. I’ve heard up to 5% is low liquidity requirement and then upwards from there it becomes more of a concern.

dkitty Wrote: ------------------------------------------------------- > Hi: > I am having trouble understand the suggested > answer for 1 AM exam, first question, > specifically regarding this guy’s ability to take > risk. > 3 years until retirement, 3.7 mil asset, needs > portfolio to generate 3.1% of liquidity needs, > strong desire to bequest, yet it suggested average > ability. > size of portfolio, large, relative to goal, time > horizon short; 3 yrs until retirement, even if > another 15-20 years in retirement; liquidity > needs, 3%, > I have trouble seeing how those averaged out to > average ability. > schwesser answer suggested 2 versions of liquidity > constraint, 1 is 2-3%, another one is 1-2%, is > there a definitive answer to what constitutes as > low liquidity reqirement ( low enough to not > affect risk tolerance)? > also in the example given, can I assume that > adding a bequest requirement makes the goal > larger, or size of portfolio smaller? I’m actually taking this exam right now (although I graded this answer already). Basically, the gist is that the fact that the guy’s portfolio is necessary for care of his sick daughter for the rest of her life seems to be what makes his ability to tolerate risk “average” (I put above average as well, for the reasons that you stated). Another kicker that got me was Schweser saying that if ability is above average but willingness is below average that you should average the two out - it was my understanding that you took the lower of the two, and in the example I just gave, you’d write “recommend counseling to reconcile the two”.

lower of two is correct I believe

skillionaire Wrote: > > Another kicker that got me was Schweser saying > that if ability is above average but willingness > is below average that you should average the two > out - it was my understanding that you took the > lower of the two, and in the example I just gave, > you’d write “recommend counseling to reconcile the > two”. But I think Schwezer says you should average the two only if the portfolio is $10M or above and at the same time the required return is less than 3%. I am looking at Practice Exam 1 Q1 answer explanation. However, I am not sure what the notes in the chapter say.

schwesser did say to average out above average and below average. answer suggested for that question stated: start out with average, if liquidity is below 1 or 2%, it is ok to say in average. this guy’s liquidity is clearly out of that range, coupled with stage of life, his intention to take care for the daughter ( which counts as bequest, I assume), I have trouble seeing how that leads to average, instead of below average. also, I have trouble making sense of the examples given in the answer. one message I got out of the suggested answer is the most important thing is liquidity, time horizon and portfolio size takes a back seat. it clearly contradicts the answer suggested for this question. so, exactly1) what counts as a high liquidity requirement, 1%? 2%? same for retired and working professional? 2)what counts as a large portfolio relative to the return requirement, 3)what counts as a long time horizon, 15 yrs? 30 yrs?

btw I seem to recall from 2009 schwsser vol.1, something about life cycle investing, it stated wealth is more important than time horizon, a retired wealthy client can tolerate risk

James@Houston Wrote: ------------------------------------------------------- > skillionaire Wrote: > > > > > Another kicker that got me was Schweser saying > > that if ability is above average but > willingness > > is below average that you should average the > two > > out - it was my understanding that you took the > > lower of the two, and in the example I just > gave, > > you’d write “recommend counseling to reconcile > the > > two”. > > > But I think Schwezer says you should average the > two only if the portfolio is $10M or above and at > the same time the required return is less than 3%. > I am looking at Practice Exam 1 Q1 answer > explanation. However, I am not sure what the > notes in the chapter say. dkitty, We were talking about average the below-avg. willingness and above-avg. ability for overall risk tolerance if the investor is independably wealthy. We weren’t talking about the steps to determine the ability to take risk.

I know, but what is the step anyway? liquidity takes priority? time horizon takes priority?

dkitty, The following thread may help. Risk tolerance is one of my weak points… http://www.analystforum.com/phorums/read.php?13,1135483 I think both are the priority; we need to consider all on an equally basis-- Regarding your Q on time horizon–15 yr. is LT; 3 yr. is ST; Mid-term is in between according to Schwezer Liquidity need–considered low if 2% or less which indicates an above-avg. ability taking risk possibly.

^ thanks,this topic is burning out my brain cell. let’s just say I found answer to this question inconsistant, even compared with the IPS question on exam 2 and exam 3. skillionaire, can you explain ur reasoning on how you came up with above average? cuz I think it should be below.

sorry to confuse things further guys but has anyone looked at the examples in the solutions to this question at the back of practise exams volume 1. I have no idea when to average the two (willingness vs ability) or when to take the lower and reconcile the difference, there is no structure at all. Is anyone familiar with the CFA text regarding whether to average/take lower risk tolerance?