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Risk Profile Analyser |
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People often think of risk as being theprospect of an undesirable outcome, such as making a financialloss. Another way of putting that could be the chance of notmeeting your goals or objectives.
Technically-speaking, risk means that there could be a numberof different possible outcomes associated with a particular actionor activity and we do not know beforehand which one will occur.Think about tossing a coin, for example. |
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Some individuals are more able to tolerate financial risk thanothers. Researchers have argued that investment risk tolerancecan be broken down into two parts:
1) Ability to take risk (or “risk capacity”)
2) Willingness to take risk (or “risk attitude”)
An individual’s ability to take risk relates to their financialcircumstances and their investment goals. Generally speaking,the higher the individual’s level of wealth and income, relativeto any liabilities they have, and the longer their investmenthorizon, the more able they will be to take investment risk, withthe corresponding potential for losses, and the greater their riskcapacity. Consideration of these issues should be a key part ofthe financial planning process.
Risk attitude, on the other hand, has more to do with theindividual’s psychology than with their financial circumstances.Some individuals will find the prospect of volatility in theirinvestments and the chance of losses distressing to think about. |
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| The conventional view is that ability to take risk and willingness totake risk should be considered separately in the financial planningprocess. We have developed a profiling questionnaire that canbe used in assessing investment risk attitude. Obviously, riskattitude is a complex area and, as a result, risk profiling is not anexact science. Nonetheless, a well-designed risk profiling tool cancontribute significantly to the financial planning process. |
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| Start the Risk Tolerance Assessment |
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