CFA Level I · CFA Level I Exam · Basics of Portfolio Planning and Construction
A client has a high willingness to take risk but a low ability to take risk because of large near-term obligations. The portfolio manager should most likely set the overall risk objective based on the:
The manager should base the risk objective on the lower of willingness and ability. When they conflict, the more conservative measure governs, since the client cannot afford losses that threaten near-term obligations even if the client is comfortable with risk.
- Ahigher of the two assessments
- Baverage of the two assessments
- Clower of the two assessmentsCorrect
Explanation
When willingness and ability conflict, the more conservative one governs, because the client cannot absorb losses that would jeopardize obligations regardless of attitude. Averaging or using the higher would expose the client to unaffordable losses.
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