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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 liabilities. When setting the client's risk objective, the adviser should most appropriately:

The adviser should set risk tolerance according to the lower of ability and willingness. Taking risk beyond the client's financial capacity could endanger liabilities that must be met, so the more conservative assessment prevails over the client's enthusiasm for risk.

  1. Aaverage the two assessments to set the risk tolerance
  2. Bset risk tolerance according to the lower of the two assessmentsCorrect
  3. Cset risk tolerance according to the higher of the two assessments

Explanation

When ability and willingness conflict, the more conservative (lower) one governs, because exceeding ability could jeopardize the client's ability to meet obligations. Averaging or using the higher one would expose the client to risk the finances cannot support.

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