It is said that the constant mix is optimal for an investor whose “absolute” risk tolerance varies with wealth. this doesn’t sound right to me as the constant mix will sell when portfolio increases in value. Can someone explain the above statement?
Its probably easier to compare it to the CPPI strategy where theoretically, you could fall to a $0 of risky asset because the market continues to fall and you continue to sell the risky asset, whereas with constant mix, at whatever asset level you are at, you will have the 60% of wealth in the risky asset.
Since you always hold the same % of stock no matter what the portfolio value, your absolute risk tolerace is icreasing with wealth. Said another way you are always holding more stocks as the account value rises.
thanks that is helpful.
no it’s not right, risk tolerance does not vary with wealth you want exposure to stocks at every level of wealth, target investment in stocks=m*wealth where 0
itstoohot Wrote: ------------------------------------------------------- > no it’s not right, risk tolerance does not vary > with wealth you want exposure to stocks at every > level of wealth, > > target investment in stocks=m*wealth > where 0 > there’s a good thread on this fyi. Relative risk tolerance does not. Absolute does. 100% sure.
itshoot, i tripped on it too as I remember risk tolerance doesn’t vary with wealth … but the answer said the CFAI does say absolute risk tolerance does. I see it now with the explanation above
mwvt9 Wrote: ------------------------------------------------------- > itstoohot Wrote: > -------------------------------------------------- > ----- > > no it’s not right, risk tolerance does not vary > > with wealth you want exposure to stocks at > every > > level of wealth, > > > > target investment in stocks=m*wealth > > where 0 > > there’s a good thread on this fyi. > > Relative risk tolerance does not. Absolute does. > 100% sure. elaborate
itstoohot Wrote: ------------------------------------------------------- > elaborate Sorry, I was on my phone. You are right that relative risk tolerance doesn’t change, but absolute does. For example, if you have a $10 account and you stock allocation is 50%, you are willing to hold $5 in stock. If the account grows to $100 you are now willing to hold $50 in stocks. So your relative amount (% in stocks) didn’t change with increased wealth levels (in fact it is constant at all wealth levels), but your absolute level (amount - $5 --> $50) does change with wealth levels.
mwvt9 Wrote: ------------------------------------------------------- > itstoohot Wrote: > -------------------------------------------------- > ----- > > > elaborate > > Sorry, I was on my phone. > > You are right that relative risk tolerance doesn’t > change, but absolute does. > > For example, if you have a $10 account and you > stock allocation is 50%, you are willing to hold > $5 in stock. If the account grows to $100 you are > now willing to hold $50 in stocks. > > So your relative amount (% in stocks) didn’t > change with increased wealth levels (in fact it is > constant at all wealth levels), but your absolute > level (amount - $5 --> $50) does change with > wealth levels. thanks for the explanation i’m still at work. is there a word in CFAI books on relative absolute difference? that’s why i said elaborate. i don’t wanna caught off guard on small nuances like this.
Not sure, I remember it from schweser.
mwvt9 Wrote: ------------------------------------------------------- > itstoohot Wrote: > -------------------------------------------------- > ----- > > > elaborate > > Sorry, I was on my phone. > > You are right that relative risk tolerance doesn’t > change, but absolute does. > > For example, if you have a $10 account and you > stock allocation is 50%, you are willing to hold > $5 in stock. If the account grows to $100 you are > now willing to hold $50 in stocks. > > So your relative amount (% in stocks) didn’t > change with increased wealth levels (in fact it is > constant at all wealth levels), but your absolute > level (amount - $5 --> $50) does change with > wealth levels. This is right. Yeah was debated on an earlier thread too.