Monday, December 27, 2010

Risk Profile

An investor's risk profile is an assessment of their willingness and ability to accept investment risk. This will be determined by their goals and objectives, investment time-frame, life-stage, age, sex, marital status, family status, financial position, etc. As an example someone who is young with no family and no major obligations, and has long term wealth or retirement savings as their objective, will have the capacity to undertake a significant amount of risk in order to generate greater returns - because they can afford to ride out any volatility. However someone who is near retirement age, with a sizable portfolio, family, etc will have a lower risk tolerance as they will need to ensure capital preservation as a key priority. But there is a psychological aspect to it as well, aside from the ability to bear risk, investors will have their own ideas about how much risk they can accept, e.g. young males are likely to be more aggressive in their investment approach, while an elderly female may be more prudent - as a generalization.

Synonyms: Risk preferences, Risk appetite, Risk aversion, Investor behavior

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