Risk Profiling is a process of finding the Optimal Level of investment risk. It mitigates potential financial risk by understanding the Phycology of investors. Risk profiling provides tailor-made advice for every investor, as different investors possess a different risk tolerance level.
Risk profiling is done through various Questionnaires and helps to determine a proper investment asset allocation for a portfolio.
- Risk Capacity is the level of financial risk, the investor can afford to take
- Ability to take risk relates to Financial circumstances Investment goals
- The higher the level of wealth relative to liabilities, and the longer the investment horizon, then the greater the ability to take risk
Risk Tolerance:
- Risk Tolerance is the level of risk, the investor is comfortable with
- Willingness or Risk Attitude relates to Psychometric assessment Framing & managing investors expectations
- If an investor has had a very low-risk tolerance (risk-averse) with a very demanding investment objective, something will have to give up
Risk Required:
- It is the risk associated with the return required to achieve the investor’s goals with the available financial resources
- Evaluate an individual’s need to take the risk to achieve a goal
- A trade-off between Risk & Return
Factors influence the investor's risk profile:
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