Schweser Practice Exam 3 AM -- Voume 1 recently, statements, individual, job

Viceroy

Question 1: very wealthy individual about to retire with no children or other expenses outside of desired travel. $3 million portfolio and 750 k severance payment coming. Has flexibility as is young and is getting job offers and could choose to work longer if needed to.

$2.25 of $3 million portfolio is in her employers stock. Made statements about glad her company recently got taken over as it was an all stock deal and her holdings in the new company should provide less volatility. Mentioned wanting to lower volatility of investments, but indicated the new holding replacing her old one should do just that.


I said she had above average ability to take risk AND above average willingness.

Schweser answer says she has above average ability but below average willingness, as she indicated she wanted to lower volatility and also was glad the new holding should be less volatile


I don't get it. How could they say anyone with a willingness to hold 75% of their net worth in one positions has a "below average" willingness to take risk?

Iginla2011

The questions Schweser write aren't always the best but I think the key here is that the information explicitly states she prefers lower vol. How her original portfolio came to own such a large portion of the company's stock is unknown. Cud be behavioural and she suffers from familiarity. Cud be she had a lot of stock options exercised or she was paid a lot in equity. Doesn't necessarily mean she was being risky and weighting her portfolio to the company stock.



Edited 1 time(s). Last edit at Saturday, May 28, 2011 at 07:26PM by Kwonyboy.