标题: IPS: Ability to take risk [打印本页] 作者: Howd 时间: 2011-7-11 19:27 标题: IPS: Ability to take risk
Hi,
Is there a systematic way in defining the client's ability to take risk? I find this area very frustrating as there is no place in the text that define the "average". Thanks for your help.作者: justin88 时间: 2011-7-11 19:27
No
NO EXCUSES作者: Valores 时间: 2011-7-11 19:27
IN a real world, there is a systematic way of defining ability and willing to take risk.
In the CFA world, it is based on 'gut' feeling..作者: mar350 时间: 2011-7-11 19:27
If person is young, then ability is usually above average (mention human capital if you can, CFAI loves this term)
If asset base is very large, above average
If there is no need to start withdrawing from portfolio right away, above average
If retired, below average
If portfolio is sole source of income, below average (unless portfolio size is really, really big relative to expenses)
Pray you get a young person or couple (above average) or a super wealthy person (above average). Above average tolerance is usually clear cut. Average or below average is tougher to gauge. If you get a retired person and can't decide what their tolerance is, go with below average.作者: canadiananalyst 时间: 2011-7-11 19:27
One thing I have notice based on EOC questions, even though they have large asset base 20x expenses but if their income is less than expenses and around age 50, inspite of long term and good asset base, CFA defines as average risk作者: pennyless 时间: 2011-7-11 19:27
If I saw this on a test:
"...you have say $50 mm in assets and annual expenditures of $3.5 mm, with inflation of 3%. That is a nominal after tax required return of 10%..."
I would say below average and not think twice.
If you require 10% return on portfolio, the ability is below average and the investor requires education about risk v return and reducing expenses. This scenario is the most complex because you can justify either way.
If I recall, the 2006 individual IPS question was about a retired soccer player who had a lot of money (tens of millions) but his expenses were like $2MM a year. I believe his ability was considered below average. I can rummage through my old exams to find it.作者: IAmNeil 时间: 2011-7-11 19:27
We are all Below Average by spending time on this forum.作者: Unforseen 时间: 2011-7-11 19:27
or *in this forum.作者: Chuckrox 时间: 2011-7-11 19:27
If you bomb on IPS you will fail the exam it`s that important. This is the FSA of Level 2. Best way to differentiate is to remember:
1) ability is ALWAYS factual, objective
2) willingness is past experience, etc = the subjective stuff
ALWAYS go with the lower of willingness and ability. Even if ability is above average and willingness is below average, the risk is below average.作者: liangfeng 时间: 2011-7-11 19:27
even i feel that willingness is easy to spot but ability becomes subjective.
also, does situational profiling affect ability or willingness?作者: thommo77 时间: 2011-7-11 19:27
jem Wrote:
-------------------------------------------------------
> darlia Wrote:
> --------------------------------------------------
> -----
>
> >
> > ALWAYS go with the lower of willingness and
> > ability. Even if ability is above average and
> > willingness is below average, the risk is below
> > average.
>
> Use to think the same too, that is take the lower
> of the two. But in the CFA text, there are
> situations when that it not so, but rather an
> 'average' of ability and willingness is taken as
> the overall risk tolerance. See the Inger family
> case study on page 128 of Book 2. Ability is
> 'above average', willingness is 'below average'
> and overall risk tolerance is 'average'.
Schweser also says this in Pratice Exams vol. 2. If ability is above-average and willingness below-average then you can average the two instead of taking the minimum.
This is another one of the very confusing contradictions in the curriculum.作者: Darien 时间: 2011-7-11 19:27
i think it's dangerous as seeing cfai / schweser conflicts as contradictory. if the cfai says something different than schweser it's probably best to forget that schweser ever said anything.作者: infinitybenzo 时间: 2011-7-11 19:27
cookthebooks Wrote:
-------------------------------------------------------
> i think it's dangerous as seeing cfai / schweser
> conflicts as contradictory. if the cfai says
> something different than schweser it's probably
> best to forget that schweser ever said anything.
But the CFAI books agree with Schweser on this bit of randomness (see jem's page reference).作者: lcai 时间: 2011-7-11 19:27
Since the constraints pretty much define the ability to take risk, I think it would be helpful if we can come up with a way to define these "default" constraints.
Time horizon: What is the "average" time horizon?
Liquidity: What is the "average" liquidity need?
I remember that it is mentioned in the Schweser video that the default liquidity requirement is something like 4-6% of the portfolio size (ignoring inflation effect). I am not too clear if this only include the living expenses that needs to be generated from the portfolio, or if it also includes other things such as planned donation. If someone can clearly define what is the "average" metrics for these constraints, maybe the process will become more methodical.作者: skycfa 时间: 2011-7-11 19:27
Per p116 vol 2, an Above Average Ability is related to "modest goals" relative to the portfolio, long time horizon (consider Stage of Life of individual - foundation = above; distribution = below), and ability to add to the portfolio (has a job or upcoming inheritance that might help pad the portfolio = above).作者: Zestt 时间: 2011-7-11 19:27
To make life easier, I use STL to determine the ability to take risk.
Size: relatively large portfolio
Time Horizon: longer time horizon.
Liquidity: less liquidity needs.作者: liangfeng 时间: 2011-7-11 19:27
Can those things be quantified at all?作者: mik82 时间: 2011-7-11 19:27
deriv108 Wrote:
-------------------------------------------------------
> To make life easier, I use STL to determine the
> ability to take risk.
>
> Size: relatively large portfolio
> Time Horizon: longer time horizon.
> Liquidity: less liquidity needs.
I think there are other considerations too, like having kids or supporting a sick relative.
NO EXCUSES作者: susana 时间: 2011-7-11 19:27
Determining the ability to take risk for a pension fund is so much easier as they will provide the data for the specific company vs the industry average. If there is such a systematic approach for the individual investor, this area will not be so vague and subjective. I just could not understand why there is no where in the text that mentions what is roughly the average time horizon and the average required return (or liquidity need) for an individual investor portfolio. If there is an "average" starting point like in the case of the pension fund, this process will be much clearer.
