Risk Tolerance Questionnaire: Fill & Download for Free

MPT is the backbone of modern investment management, and rightfully so. The concepts of diversification and the evaluation of potential portfolio additions in light of their effect on the aggregate portfolio are very important insights.I think the big revolution in MPT will come from an alternate understanding of “utility.” Utility is a fuzzy concept in economics, but it is basically an arbitrary number which measures how much you value one thing over another. It is central to an understanding of investment management because it ultimately determines your allocation to potential investments. Currently, utility is understood in the context of “risk aversion”—an investor would prefer less risk to more.However, MPT understands risk as portfolio standard deviation. That makes sense on the face of it, but is that really how you define risk? Risk, in my mind, is the risk of not achieving your goal. That is why you are investing in the first place, no? Risk understood as goal-failure is a foreign concept in MPT, though some research is being done to try and merge the two [1].We can see this pretty easily through the utility formula used by MPT:[math]U=r-\gamma\frac{1}{2}\sigma^2[/math]The expected utility of a portfolio is the expected return minus 1/2 the variance of the portfolio times the investor’s risk-aversion constant. You know all those risk-tolerance questionnaires you take when investing? Those are attempting to gauge your [math]\gamma[/math], your risk-aversion constant.Again, the trouble lies in assuming that your risk-aversion is 1) linked to portfolio variance, and 2) cross-applicable to different contexts. Most people care about achieving their goals, and volatility concerns them only because it threatens their goal-achievement. They don’t necessarily care about volatility for it’s own sake.But assumption #2 is the most damaging. What we are better understanding now is that people have multiple and simultaneous things they are trying to achieve. They have “needs, wants, wishes, dreams” [2], and each of those things have a different risk-aversion. Again, that risk aversion is not linked to standard deviation, it is linked to the probability of achieving a goal.At any rate, these are the flaws I currently see in MPT (and am actively trying to fix). However, on the whole, MPT is a better approach than what was done previously. Hopefully, we can continue to advance the ball of knowledge forward!—[1] Das, Markowitz, Scheid, and Statman. “Portfolio Optimization with Mental Accounts.” 2010.[2] Brunel. Goals-Based Wealth Management, 2015.

Wealth creation is every one’s dream. We Indians are born savers. We grew up seeing our parents, grand parents save from their income year-on-year. Most of us came from the middle class families. Middle class is the most focused and disciplined investor. This group work hard for the livelihood. And try to save maximum to safeguard family’s future. Our parents mostly saved in the traditional financial products. Their aim was to keep some amount of their income away to face any emergencies. They never thought of creating wealth by that saving. Their dreams were limited. They were more than happy in their present state of income ladder.But in our times our desires, dream and aspirations are increasing day by day. We want to climb up the class ladder. Those who are low middle class want to be upper middle class. Upper middle class want to be HNIs. And HNI’s want to be multibillionaire. We find it difficult to just satisfy our wants through our regular income. We try hard to multiply our wealth. But reality can we build wealth just by saving ? Merely Saving in bank account will we create wealth? The answer is No. We have to make our savings work for us. This process is called INVESTING.One of the most important step the investor should take before starting investing is to undergo Risk Profilling.What is Risk Profilling?Risk profilling s a process of defining investor’s risk tolerance - attitudes, values, motivations, preferences and experiences.The Financial Planner seeks help of Risk Profilling Questionnaire in understanding the risk tolerance levels of the investor. Risk Tolerance is the assumed level of risk that a client is willing to accept.Risk tolerance is typically measured using questionnaires that estimate the ability and willingness to take risks. The responses of investors are converted into a score that may classify them under categories that characterize their risk preferences.Investors are classified in following 3 main categories based on their risk preferences.Conservative Investor :Do not like to take risk with their investments. Typically, new to risky instruments.Prefer to keep their money in the bank or in safe income yielding instruments.May be willing to invest a small portion in risky assets if it is likely to be better for the longer term.Moderate Investors.May have some experience of investment, including investing in risky assets such as equities.Understand that they have to take investment risk in order to meet their long term goals.Are likely to be willing to take risk with a part of their available assets.Aggressive InvestorsAre experienced investors, who have used a range of investment products in the past, and who may take an active approached to managing their investments.Willing to take on investment risk and understand that this is crucial to generating long term return.Willing to take risk with a significant portion of their assets.These are the three broad categories of the investors. Sub categories can beModerately conservativeWant reasonably stable growth and/or a moderate income and are willing to accept a moderate level of risk. Your investment term is a few years or more.BalancedAre looking for a diversified portfolio that contains a balance of security and the potential for growth. You’re willing to accept a certain level of volatility and will typically be prepared to invest for five years or longer.Moderately aggressiveWant to invest in a broad range of asset classes but with a greater focus on growth rather than income. You’re willing to accept volatility in the value of your investments in return for potentially higher growth, and you could be looking to invest for up to 10 years.Financial Advisors take into account the risk preferences of the investor while constructing an investment portfolio. The aim of risk profiling in financial planning is to not only determine the financial risk you have the capacity to take, but also the level of risk you are willing to take.DIY(Do It Yourself) should follow the same steps for assessing self risk tolerance level.Risk profiling is thus very important to design a financial plan with appropriate asset allocation most suited to meet your investment requirement and as per your individual risk tolerance. Investors should use a risk profile as a way to mitigate potential risks and threats of the financial products they have chosen for the investments.

You can Google “risk tolerance questionnaire stocks” and find lots of them online. If you prefer, you can look at the one provided by Vanguard at:Determine your asset allocation