Schweser Book 1 Exam 2 AM Question 1 I nailed the Return Requirement. Even better I nailed the whole thing except the Risk Tolerance. I’m pumped. I think it’s a softball question, but hey, I’ll take anything at this point.
wait until you do book 7…
after repetition…these IPS are starting to really come together…
congrats BB … anything to boost the confidence level … keep going.
good job BB. I just did that one and had a question about ability to take risk. Schweser says that the Smythe’s annual living requirement are high compared to the portfolio. I was thinking that 116,438/3,750,000 = 3.1% was relatively low. Do you or anyone on the forum know if there’s a general rule about this. What percentage of living expenses is considered high in relation to portfolio value and what is considered low? Thanks guys.
Ya, I kinda had the same question myself, and even more so on the willingness aspect. The client made a statement that “We believe our portfolio should never suffer more than a 10% loss annually. In addition, we do not want to invest in any individual investment or security that is ‘to risky.’” I think you could easily read into that statement that the client has an average risk tolerance. According to their answer, basically if a client even mentions the word risk you should assume they are below average tolerance. That’s pretty freakin subjective to me.
I agree that it’s all very subjective. If I’m being conservative and judge it to be low risk tolerance, the answer will be high. On the next paper I go with the more aggressive approach and think it’s high risk tolerance and this time the answer will the low. I can’t help but think that it is depends on the opinion of the question writer. I think I might just flip a coin in the exam as currently I seem to be doing a good job of avoiding the correct answer.
One thing to note is that I see “above average” and “below average” much more often than I see just plain “average”. I generally put “below average” willingness if there is even a single phrase in the vignette that smacks of anxiety. For example, if the question says “Jack and Sue consider themselves knowledgable investors and are currently heavily invested in EM equities and debt, along with domestic small cap equities and a small treasury bond exposure. They are both 30 years old. Jack has commented that he loves skydiving and is an adrenaline junkie. Sue sometimes gets nervous about her investments, and finds herself frequently checking the portfolio to see if it has lost any value.” In this case I would ignore everything but the last sentance. Whenever there is above average willingness to take risk, I tend to see something that makes them sound like a “sophisticated investor”… entrepreneurial background, reads the WSJ every day, etc. Never gets emotional about investments, etc. In other words, CFA and Schweser both seem to associate “below average risk willingness” with some degree of stupidity or naivety or nervous emotionalism", and “above average risk willingness” with sophistication and rationality.