Ability to Tolerate Risk individual, therefore, maintain, Because, ability

Howd

Could this be a factor that increases someone's ability to tolerate risk?

-Could reduce living expenses (flexibility)

Could this be a factor that decreases someone's ability to tolerate risk?

-Wants to maintain real value of portfolio

...Because Schweser has listed them as valid answers in their 2010 Practice Exam 3 Book 2 #1.B...and I always thought those were just assumed to be true for every single individual IPS

So therefore, we can always put those two answers on the exam and get credit, no?

Analti_Calte

Personally, I would have thought flexibility was a valid reason leading to the ability to accept more risk. I would have taken the real return aspect to be a given though.

My criteria for ability to take risk are:

- Long time horizon
- Low spending needs (<5% of portfolio)
- Significant future cashflows (life insurance / retirement CF)
- Stable income
- Zero liquidity needs for a number of years
- Flexibility

I wouldn't woory too much. If they ask for ability reasoning, real return might get you a point (or a half), but I'm sure there would be something more obvious. Practice the questions. If they ask you for two reasons justifying something, there are probably three or four up for grabs.



Edited 1 time(s). Last edit at Monday, May 23, 2011 at 08:48PM by mutton.

Chuckrox

I just thought those two (flexibility, inflation) were always a given.

Notice how you NEVER see an IPS that says "John has $250,000 a year in living expenses and he cannot reduce that because he wants to be like Charlie Sheen"

or

"Mary doesn't care about inflation because she has pancreatic cancer and only has 6 months to live"

Seriously, if I put those two factors in my first post in an answer I would not expect to get credit.



Edited 1 time(s). Last edit at Monday, May 23, 2011 at 08:55PM by AndyPettitteIsGreat.