This is 2006 morning essay question, a soccer play who: 1, has large asset base 2, long time horizon, he’s 35 year old. but 1, has no income now coz he retired. 2, big expense for his girl friend and their kid. the required nominal after tax return is 8.73% Shall I categorize him average? or above average? Is there some clear rule for these kinds of stuff? I am so confused and never guessed right.
this is interesting. his human capital / financial capital relationship would seemingly be reversed from the norm, correct?
cookthebooks Wrote: ------------------------------------------------------- > this is interesting. his human capital / > financial capital relationship would seemingly be > reversed from the norm, correct? It doesn’t really matter. I just need you say, average? or above average? If you guessed wrong, then you are screwed, like me 
i wish i took L3 in 2006. this whole test hit me right. his asset base was large enough where he could be pretty aggressive if i remember correctly, plus could get a job or endorsements, blah blah blah, still lots o human K. but he had lost $$ in a dumb deal spending his signing bonus, so his willingness had decreased a bit. mmm… soccer player.
Ability is average -Large asset base and long time horizon indicate an above average risk tolerance. -Moderate return requirement compared to investable assets and reliance on asset returns as the sole source of income are mitigating factors. Can’t comment on willingness since no information was provided. I don’t get why everyone is having difficulty with these questions, they’re pretty intuitive. Even if I get it wrong, I think my justification would get me at least some partial credit.
I think it is inconsistent in CFAI answers for example , in 2009 AM , willingness to take risk ,they said : Their desire for preservation of the real value of their portfolio and in 2006 AM , they list ability to take risk- Their desire for preservation of the real value of their portfolio I think it is willingness for it is subjective based on their willingness as in the case , I think it is subjective to decide whether he is above average or average and no objective threhold
Bannis is right, I remember seeing a tip to look for “flexibility” in capital needs. He is young, he could get some endorsement deals, he could still go into a career if he needed more money. It’s not like he is stuck in a low paying job where he can’t get ahead - he already has an asset base established. I would say he is above average. I think the problem arises when people think of this situation in terms of this is his end portfolio, and not in terms of what he can do with the portfolio. The question says he’s retired from soccer playing - not that he’s never going to work or make money ever again.
+Large Asset Base +Long Horizon -/+No income but income possibly flexible. -Limited Flexibility Between Child and Payment Above average.
It all depends on whether he is going to earn money or not. Earn money - above average Not earn money - average
On all of these CFA questions I start out as above average unless there is something that really makes me think lower. It has worked so far.
answer per the CFAI is Above Average…
bpdulog Wrote: ------------------------------------------------------- > Ability is average > > -Large asset base and long time horizon indicate > an above average risk tolerance. > -Moderate return requirement compared to > investable assets and reliance on asset returns as > the sole source of income are mitigating factors. > > Can’t comment on willingness since no information > was provided. > > > I don’t get why everyone is having difficulty with > these questions, they’re pretty intuitive. Even if > I get it wrong, I think my justification would get > me at least some partial credit. Be careful bpdulog…you would have been wrong on this ?. In the 2006 exam they asked for 2 factors that increase ability and 2 factors that decrease ability and then what is overall ability (no justification provided). Overall ability is above average
… I like 2006
I am with bpdulog on this one. If you look at how CFAI presents this material and how they answer those questions, emphasis is made on dissecting the facts and what they imply. So what I would do is individually assess each facts and say whether or not it implies above, average or below BOTH willingness and ability to take risk. Then at the end use a “scoring matrix” and decide if what the overall risk tolerance is. You will get most of the points getting these initial steps correct than the conclusion.
Justifying an “incorrect answer”, in my opinion, will not get you any partial marking. bpdulog Wrote: ------------------------------------------------------- > Ability is average > > -Large asset base and long time horizon indicate > an above average risk tolerance. > -Moderate return requirement compared to > investable assets and reliance on asset returns as > the sole source of income are mitigating factors. > > Can’t comment on willingness since no information > was provided. > > > I don’t get why everyone is having difficulty with > these questions, they’re pretty intuitive. Even if > I get it wrong, I think my justification would get > me at least some partial credit.
Zain Zafar Wrote: ------------------------------------------------------- > Justifying an “incorrect answer”, in my opinion, > will not get you any partial marking. > > bpdulog Wrote: > -------------------------------------------------- > ----- > > Ability is average > > > > -Large asset base and long time horizon > indicate > > an above average risk tolerance. > > -Moderate return requirement compared to > > investable assets and reliance on asset returns > as > > the sole source of income are mitigating > factors. > > > > Can’t comment on willingness since no > information > > was provided. > > > > > > I don’t get why everyone is having difficulty > with > > these questions, they’re pretty intuitive. Even > if > > I get it wrong, I think my justification would > get > > me at least some partial credit. According to Kaplan that is correct, but who knows.
That’s fine, I’m still going to to go through the process I was taught. If I get it wrong, I get it wrong, big deal.
These risk tolerance questions are beyond subjective anyway. Institutional risk tolerance at least seems more objective.
bannisja Wrote: ------------------------------------------------------- > i wish i took L3 in 2006. this whole test hit me > his asset base was large enough where he could be > pretty aggressive Interesting, so the bigger his assets the more agressive he can be?
The endorcement deal is important, it would imply a flexible amount of labour hours, so he could work more if his investments go down. However, depending on how much current income he needs it could be tough and go.