CFA Level I · CFA Level I Exam · Portfolio Management: An Overview
An adviser is drafting an IPS for a client whose willingness to take risk is high but whose ability to take risk is low. In setting the overall risk tolerance, the adviser should most appropriately:
The adviser should set overall risk tolerance at the lower of ability and willingness. When the two conflict, the more conservative one governs, because a client who is eager to take risk but cannot absorb losses could suffer unacceptable harm if the risk materializes.
- Aset risk tolerance to the lower of the twoCorrect
- Baverage the two to set risk tolerance
- Cset risk tolerance based on the client's willingness
Explanation
When willingness and ability conflict, the more conservative of the two governs the overall risk tolerance, since the client cannot afford losses beyond their capacity. Averaging or following willingness could expose the client to unacceptable losses.
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