IPS - risk tolerance. net, understand, required, ability

ShooterMcCFA

Schweser practise exams vol 1. Exam 2. Q1 P.232.
The answer say the portfolio has significant liquidity needs - must provide $116,438 (net cash outflow p.a). So the guy ‘s ability to take risk is below average.
But the guy has net investable asset of $3675,000. $116,438 p.a liquidity needs means only 5.1% required return (after adding 2% inflation). I don’t understand why his ability to take risk is below average.
Can someone explains?

bolligerallstar

read somewhere, not sure the source, that rules of thumb is if annual cash need = 1-2% nominal pre tax , then you can take above average risk. Here it is above 5%, not a trivial number since you may be forced to liquidate 5% in a down market to meet this need – can never catch up – not able to tolerate too much volatility.