Curriculum Volume2 Page370 - The table in Exhibit 1 only discusses risk tolerance. How is Willingness and Ability affected in each of the 5 categories? Thanks! If Overfunded Plan = Surplus - risk tolerance INCREASES - ability INCREASES - willingness ??? If Sponsor is financially strong - risk tolerance INCREASES - ability INCREASES - willingness ??? If Correlation of sponsor operating results with pension asset returns DECREASES - risk tolerance INCREASES - ability ??? - willingness ??? If Time Horizon INCRESES due to no provision for early retirement - risk tolerance INCREASES - ability ??? - willingness ??? If Time Horizon INCREASES due to younger workforce age - risk tolerance INCREASES - ability ??? - willingness ???
When it comes to a defined benefit plan their is no willingness (pretty sure I’m right about this) The investment professionals fudiciary duty to the beneficiaries is to ensure that benefits are met with the lowest possible risk. Since willingnes doesn’t play a role in determining overall risk tolerance, all the abilities above will increase.
Willigness should increase as the total risk tolerance increases, however it is ultimately the investors decision. If they want to be ultra conservative, you as the money manager have to respect their wishes. Also, the fiduciary duty is that you must ensure best return for given level of risk like Kerry1 said. Willingness DOES play a role in overall risk tolerance. Can invest riskier than your client is willing. Also, If Correlation of sponsor operating results with pension asset returns DECREASES - risk tolerance INCREASES - ability - INCREASES (if times are bad for your company, your pension will do well. If times are good for your company, your pension will do poorly, however the company can afford to contribute more to the pension plan out of their own pocket. Less correlation increases the risk taking ability because the overall portfolio is more diversified) - willingness ???- (will always be dependant on client) If Time Horizon INCRESES due to no provision for early retirement - risk tolerance INCREASES - ability ??? INCREASES - (longer the time horizon before the liabilties are due, the more oppurtunity the employer has to make up for losses. So a longer horizon gives them a higher abiltiy to accept risk) - willingness ??? - (will always be dependant on client) If Time Horizon INCREASES due to younger workforce age - risk tolerance INCREASES - ability ??? - (same as previous answer regarding time horizon) - willingness ??? - (will always be dependant on client) sorry this is so long winded, but hope it helps.