CFA Level I · CFA Level I Exam · Portfolio Management: An Overview
A client has a high willingness to take risk but a low ability to take risk because of large near-term spending obligations. The adviser should most likely set the overall risk tolerance in the IPS as:
The overall risk tolerance should be set below average, following the lower of ability and willingness. When the two conflict, the more conservative measure governs, because a client who cannot afford losses should not take high risk even if psychologically comfortable with it.
- Ahigh, because willingness reflects the client's preferences
- Bbelow average, because the lower of the two dominatesCorrect
- Caverage, because the two measures should be averaged
Explanation
When ability and willingness conflict, the more conservative of the two generally governs overall risk tolerance. A client unable to bear losses should not be exposed to high risk simply because they are willing. Averaging is not the standard approach.
Did you get it right without looking?
One question tells you little. A timed set on Portfolio Management: An Overview shows your real accuracy, how long you take and where you lose marks.
More Portfolio Management: An Overview questions
- In the portfolio management process, the step in which the manager sets out the client's objectives, constraints and the strategic asset all…
- Which of the following IPS constraints is most likely to be affected by a client's need to withdraw cash regularly to fund living expenses?
- A non-life insurance company writes policies with uncertain claim timing and amounts. Relative to a life insurance company, the non-life ins…
- A mutual fund charges a management fee of 1.00% of assets, and an investor holds the fund for several years. Compared with a fund charging a…
- Which task is most likely part of the execution step of the portfolio management process?
- A university endowment aims to support the institution's operating budget indefinitely and to preserve the real value of its assets. Which o…