Portfolio Management - Portfolio Management Section 2
21. Which of the following factors is least likely to impact the risk-taking ability of a client?
- Option : B
- Explanation : An individual‟s ability to take risk is impacted by such factors as time horizon and expected income. Personality type is most likely to impact an individual‟s willingness to take risk.
- Option : A
- Explanation : The client is in a strong financial situation (stable job, no debt), has a reasonably long time horizon before needing any liquidity (10 years), and reasonable retirement spending needs relative to total assets. These factors indicate a high ability to take risk. In addition, the client‟s knowledge of financial markets, experience, and focus on the long term also indicates a high willingness to take risk.
- -The client has earnings that have exceeded $150,000 (pre-tax) each year for the past four years and has no dependents. The client’s basic needs are approximately $49,500 per year.
- -The client states that he feels particularly uncomfortable with his limited understanding of securities markets.
- -All of the client’s current savings are invested in short-term securities guaranteed by an agency of her national government. The client responded to a standard risk assessment questionnaire suggesting that he has low risk tolerance.
The client is best described as having a:
- Option : C
- Explanation : On one hand, the client has a stable, high income and no dependents. On the other hand, he exhibits above average risk aversion. His ability to take risk is high, but his willingness to take risk is low.
- Option : B
- Explanation : An individual‟s willingness to take risk is impacted by factors as personality type. Wealth and time horizon are most likely to impact an individual‟s ability to take risk.
- Option : B
- Explanation : When defining asset classes, paired correlations of assets should be relatively high within an asset class. However, paired correlations of assets between different asset classes should be low in order to provide diversification relative to other asset classes.
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