For the record, I can’t stand the IPS section. I wanted to get your opinion on an issue I keep running in to with these questions. It seems like I always see scenarios where it is very hard to gauge the willingness to take risk. In particular, there seem to frequently be occasions where, for instance, the investor will currently have a portfolio of risky assets, yet they will talk as if they are quite risk averse. On the other hand, I’ll also see instances where they seem open to taking risk based on what they say, yet their portfolios seem very conservative. In these situations, is there any sort of rule to go by? My initial inclination was to assume that the investor is always more or less uninformed, and so that if for instance they sounded risk averse but had a risky portfolio, I attributed that to them not realizing how risky their portfolio was/not receiving proper guidance in the past, and would label them as risk averse. Yet–and I believe these instances arose in the CFAI curriculum (see problem 7 in the end-of-chapter questions for reading 72)–this seemed to be the wrong approach, b/c CFAI would say that their existing portfolio was evidence of their willingness to take risk. Then, in the sample exam 2, there is that Amin guy with the portfolio of stocks, private equity, and real estate, and yet he is considered risk averse by CFAI because he talks about how, after retirement (pre and post retirement being the distinction I guess), he wants to avoid negative returns. Any thoughts?
yea its kind of counter intuititve how these filthy rich ppl have below avg risk ability. Yet joe schmoe the factory worker with 4 kids and a wife, with 60k in credit card debt, annual household income of 58k can be above avg risk ability.(just because they inherited 500k). you have to look at how old the person is, younger= more risk and when they need the money.
If he is unwilling to accept risk, and his portfolio indicates that he can accept risk, then you have to educate him
If he has the ability to take “above average risk”, but doesn’t have the willingness…it stops with his willingness. If he has the willingness to take “above average risk”, but doesn’t have the ability then you educate him.
I think for portfolio decisions, you are going to have to make decisions based on whether his portfolio can take risk or not. It doesn’t matter his own personal preferences (or willingness) For example, a 20 year old that is risk adverse, and is invested fully in bonds. I think the CFA institute, would want you to put his portfolio more in stocks. It doesn’t matter about the clients willingness. I read some question, where the answer was to educate the client and tell him to be less risk adverse.
“It doesn’t matter about the clients willingness”. You can show him that he is able to take more risk, but by no means should you push the client beyond his willingness.
Sponge_Bob_CFA Wrote: ------------------------------------------------------- > If he has the ability to take “above average > risk”, but doesn’t have the willingness…it > stops with his willingness. If he has the > willingness to take “above average risk”, but > doesn’t have the ability then you educate him. Thata Boy!!! on a side note: are you sure about these??..I know there have been a dozen threads with debates about this…and I read through the cfa text - but still couldn’t conclude …!!
IMO, you can discuss it with a client, but pushing him into more risk than he’s/she’s comfortable with is a no-no (at least in real life…great way to set yourself up for a lawsuit otherwise).