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1. “Ellen and I do not consider ourselves wealthy by any measure. Although the inheritance doubles our net worth, I know plenty of others with substantially greater retirement accounts. Besides, we have a quite a bit tied up in the business. On top of that, we will probably live another 25 years. So I think we are average risk-takers.”
2. “Ellen’s work has made her sensitive to potential property and casualty or liability losses. She leaves the investment decisions up to me, but says that we should be careful.”
3. “I had a great return with Netshopper stock and sold it too early. I bought it at $1.25. Last year when they announced a distribution deal with Nike the stock jumped to $8.75 so I sold. It’s still going strong, as both their sales model and management team are winners. Yesterday, I checked and it closed at $26.00.”
4. “I've been following a stock called Computrol which was projected to hit $42.50. New information came out from the company with predictions it should hit $85.00 but analysts predicted it will only hit $65.”
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Statement 1: | Since investors tend to exhibit irrational, psychological characteristics, the investor should be educated so that these characteristics are put aside and rational expectations can be the sole determinant of the investor’s risk and return objectives. |
Statement 2: | Investors that exhibit the characteristic of asset segregation may tend to take on more risk than necessary in their portfolios. |
Statement 1 | Statement 2 |
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Procedure 1: | Consider the client’s risk tolerance and return objective separately from one another. |
Procedure 2: | Focus on the investor’s required returns only, as desired returns are not important when drafting the IPS. |
Procedure 1 | Procedure 2 |
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Willingness to Take Risk | Ability to Take Risk | Overall Conclusion |
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