HKSI Paper 12 The investment management process question: HK$3 million portfolio

HKSI Paper 12The investment management process

Mr Chau, 35, earns a high, secure salary, has no debts and will not need his HK$3 million portfolio for 25 years. He says he would sell everything after a 10% fall. How should his manager set his risk objective?

A Above average, as his ability to bear risk is the objective measure that prevails
B Moderate, splitting the difference between ability and willingness without raising it
C Not at all, until his willingness and his ability to take risk come into agreement
D Below average, reflecting his low willingness, and discuss the conflict with him

Show the answer and explanation

Answer: D. Below average, reflecting his low willingness, and discuss the conflict with him

Risk tolerance has two parts: ability to take risk (horizon, income, wealth, liquidity needs) and willingness to take risk (the client's attitude). Mr Chau's ability is high, but his willingness is low: he would sell after a 10% fall, locking in losses. When the two conflict, the usual practice is to set the risk objective by the lower of the two and to discuss the conflict with the client, who may later accept more risk. Setting it by ability alone invites panic selling. Quietly averaging the two hides the conflict. Refusing to set any objective leaves the mandate with no risk target. Source: Standard investment management process (planning, execution and feedback); investment policy statement practice (as at October 2026).

Common mistake

Assuming the objective measure (ability) overrides attitude. Where they conflict, the more conservative of the two normally sets the risk objective.

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Original study material mapped to the public HKSI Paper 12 syllabus. Unofficial, not endorsed by HKSI Institute or the SFC. Verify figures and rules against current guidance before relying on them.