CFA Level I · CFA Level I Exam · Portfolio Management: An Overview
An investment policy statement (IPS) for a client states that the client's liabilities are due in 3 years and that a market decline would force the sale of assets to meet them. This statement most likely describes the client's:
The statement describes the client's ability to take risk. Ability depends on objective factors such as time horizon, liabilities and liquidity needs. Near-term liabilities that could force sales after a decline reduce capacity for risk, whereas willingness reflects subjective attitudes.
- Arisk tolerance only
- Bability to take riskCorrect
- Cwillingness to take risk
Explanation
Ability to take risk is an objective measure driven by factors such as time horizon, liabilities, wealth and liquidity needs. Short-dated liabilities that could force asset sales reduce this ability. Willingness is a subjective, psychological attitude toward risk and is not described here.
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