Skip to content

CFA Level I · CFA Level I Exam · Basics of Portfolio Planning and Construction

A client has a stable, high income and a long horizon, so she can absorb large losses. However, she becomes highly anxious during market declines and says she cannot tolerate losing more than 5% in a year. Her overall risk tolerance is most appropriately described as:

Her overall risk tolerance is below average. When ability to take risk is high but willingness is low, the adviser should normally defer to the lower of the two, because a client unwilling to bear losses may abandon the strategy during a downturn.

  1. AAbove average, because ability to take risk dominates
  2. BBelow average, because the lower of ability and willingness governsCorrect
  3. CAverage, because the two factors offset each other

Explanation

When ability and willingness conflict, the more conservative one should generally govern overall risk tolerance. Averaging them ignores that the client may abandon the plan under stress, and ability does not override stated unwillingness.

Did you get it right without looking?

One question tells you little. A timed set on Basics of Portfolio Planning and Construction shows your real accuracy, how long you take and where you lose marks.

Practise Basics of Portfolio Planning and ConstructionFree diagnostic mock

More Basics of Portfolio Planning and Construction questions