Does a bequest desire increase or decrease risk tolerance? liability, something, represent, decrease

bchadwick

Schweser has always been pretty consistent on this: they say that adding a bequest desire decreases risk tolerance.

Meanwhile, on Q2 from the 2009 Morning, CFAI says that the bequest desire increases risk tolerance because it changes the time horizon to multi-generational.

My current interpretation is that because the bequest desire is simply to "maximize the possible bequest", it does not represent a future liability. If, however, the client says something like "I want to leave behind $X so that my children can get a stipend of $Y per year", this decreases risk tolerance.

But mostly, I don't know. Anyone have any guidance?

mar350

I think in 2009 q2, remember what you're answering, maximising the bequest has higher risk tolerance than the previous objective, to meet living expenses in retirement (at very least because of longer time frame, also because it's discretionary!). Note the bequest alone doesn't increase risk tolerance.

My view, if the question was typical, e.g. "what factors limit their ability to take risk?" I would choose bequest as a last resort, there are normally more convincing risk factors to argue with.

ohai

agree with op's interpretation. If they specify a dollar amount they want to leave, then that will give you an idea if it increases or decreases (based on current value). If they want to maximize, I think it is safe to say that the horizon increases (which increases the ability to take risk). But, i too would use this as a last resort.

lcw77

one of the cfa mocks has a question mentioning this, and having the bequest increases ability to tolerate risk as if performance is poor they can reduce the size of these gifts.

note the working of the spiel at the start of the question says they 'wish' to leave gifts, ie desired but not necessary

NakedPuts2011

The answer is always flexibility!