CFA Level I · CFA Level I Exam · Basics of Portfolio Planning and Construction
In an investment policy statement, an investor's ability to take risk is most likely determined by the investor's:
Ability to take risk is determined by objective financial circumstances such as wealth, time horizon, income stability and liabilities. Emotional comfort with volatility and past experience with losses describe willingness to take risk, which is the subjective part of risk tolerance.
- Aemotional comfort with market volatility
- Bfinancial circumstances such as wealth, time horizon and income stabilityCorrect
- Cpast experience with investment losses
Explanation
Risk tolerance has two parts: ability (objective, based on financial factors such as wealth, income stability, liabilities and horizon) and willingness (subjective, based on attitudes and psychology). Emotional comfort and past loss experience relate to willingness.
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