We think only about RETURN on investments. However, the word RISK is rarely understood. Like fingerprints, investment profiles of people are always unique. Age, Life stage, income, savings, dependents and mindsets are factors that define a person's attitude towards investments. Risk taking ability and mental frame of mind plays a key role in determining where we ultimately put our money.
The first step in asset allocation is `Risk Profiling'. Risk Profiling combines two key areas -
1) Estimating financial risk-taking capacity and
2) Understanding the (psychological) risk tolerance level of an individual.
Risk Tolerance test helps to make judgments about our financial possibilities. Analysis of risk profiling can generate following risk tolerance level. The range is indicative only.
Conservative = Highly risk averse
Moderately conservative = Risk Averse
Moderate = Risk Neutral
Aggressive = Risk tolerant
Very Aggressive = Risk seeker
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