Shortfall Risk in IPS

Is shortfall risk willingness or ability?

Is there any instance where shortfall risk would NOT lower risk tolerance (i.e. how low of a # would it have to be for it to not lower the client’s risk tolerance)?

I’d say it is willingness.

I think it could have no effect on tolerance if other information has already made you think that the client has either low willingness or ability.

it could be either. if you need to make a certain payment in the next year on your mortgage and you are depending on your portfolio to generate the return… etc. that’s ability more than willigness.

Making a payment in a year is not ability to tolerate risk. It is a liquidity constraint and it may have an effect on return required. Although I guess it indirectly affects your ability to tolerate risk because it effects your asset base.

any answer on this? can anyone finnd an exam where it was thrown into ability or willingness, i cant find one.

unwillingness to bear a shortfall (or an intended shortfall) is usually willingness.

From the Book:

Furthermore, the Ingers do not want a portfolio value decline of more than 10 percent in nominal terms in any given 12-month period. Their willingness to take risk is generally “below average.”

thank you cpk. best of luck to you (and everyone else) tomorrow. i hope we all pass.