Why is this inconsistent. Sometimes they say willingness dominates ability while other times they take the average of the two. Book2, Reading 10, EOC.
EOC # 11: The people have above average ability and below average willingness “their stated preference of “ minimal volatility ” investments, however, apparently indicates a below-average willingness to assume risk.”.
When computing the overall risk, the answer says: “In sum, the Muellers’ risk tolerance is average.”
EOC #13: THe people have above average ability and below average willingness “desire not to experience a loss in portfolio value in excess of 12 percent in any one year.”.
When computing the overall risk: “The Maclins’ overall risk tolerance is below average , as their below-average willingness to take risk dominates their average ability to take risk in determining their overall risk tolerance.”
Historically, CFA Institute’s position is that you take the more conservative of willingness and ability, so willingness clearly does not dominate ability.
Recently, in the specific case where one of willingness and ability is above average and the other is below average, CFA Institute has concluded that the overall risk tolerance is average. Apart from this one case (well, two cases, technically), they stick with the more conservative of willingness and ability.
Note that if willingness truly dominated ability, there would be no reason to determine a client’s ability to take risk.
Hi, just to enquire further for better clarity.
If ability is high and willingness is low (vice-versa), the risk tolerance is average.
If ability is high and willingness is avg = risk tolerance is average
if ability is avg and willingness is high = risk tolerance is average?
Did i understand it correctly? Also, can I also deduce that if an investor is not willing to accept losses greater than 10%, his risk tolerance is already above average and if < 5%, his risk tolerance is average? is there a way to read these correctly?
What do you mean by “if willingness truly dominated ability, there would be no reason to determine a client’s ability to take risk?” as in there is no way to determine risk tolerance if willingness dominates ability?
I kind of just start in the middle and move up or down depending on the facts. I think an answer of ‘average’ on the exam is unlikely. I just feel like they want you to make a statement for above or below…average seems like the safety answer they’ll want to mark you down for. Purely my own theory having done a boatload of mocks
How about risk tolerance with expected return? Is it reasonable to assume certain risk tolerance would have a preferred range of lost of capital?
For example, High risk tolerance may be okay to accept loss of capital up to 10% and moderate, not more than 5%.
Do we have to work with assumptions in a text or just use information given in the text? Wealth management questions really feel open ended and I tend to take way too much time writing more than the marks may have justified.