Assessing the risk tolerance of the investor

Part 1 - You and Your Current Financial Situation

1. How old are you?
a. Under 30 [6] b. 30-39 [5] c. 40-49[4]
d. 50-59 [2] e. 60 and Older (0)
2. What is your estimated net worth?
a. < Rs 10 lakh [1] b. > Rs 10 lakh & < Rs 25 lakh [2]
c. > Rs 25 lakh & < Rs 50 lakh [3] d. >50 lakh & < 1 crore [4]
e. > Rs 1 crore & < Rs 5 crore [5] f. > Rs 5 crore [6]
3. How would you classify your family’s overall financial situation?
a. No savings and significant debt [0]
b. Little savings and a fair amount of debt [1]
c. Some savings and some debt [2]
d. Save quite regularly and have paid off most debts [3]
e. Few debts and are quite financially secure [4]
4. When you retire what additional sources of income do you believe that you will
receive? (Multiple options can be selected)
a. Pensions plan and old age security [4]
b. Inherited property [4]
c. Pension plan from an employer [4]
d. Other means with which you can comfortably lead post retirement life
e. Nothing [0]
5. When it comes to understanding your investments, how would you rate your
knowledge?
a. Very limited/No knowledge [0]
b. Basic knowledge (aware of the differences between stocks, bonds etc. [1]
c. Fair amount of knowledge (aware of different investment options and their
risks) [2]
d. Considerable knowledge (aware of different investment philosophies) [3]
e. Extensive knowledge (complete understanding of investment products and
strategies [4]
Part 2: Assessing Your Investment Goals and Objectives
6. When will you need access to all or a portion of this investment portfolio?
a. 5 years or less [0] b. 6 -10 years [1]
c. 11- 15 years [2] d. 16-20 years [4]
e. 21-25 years [5] f. 25 years or more [6]
7. What is the primary purpose for this portfolio?
a. Security [0] b. Inflation protection [2]
c. Growth & Security [3] d. Growth [4]
e. Maximum growth [5]
Part 3: Assessing Your Attitude Towards Risk
8. Over any one one-year period, what is the maximum drop in value of your investment
portfolio that you would be comfortable with ?
a. 0% [0] b. 1-6% decline [2]
c. 6-11% decline [3] d. 11-15% decline [6]
e. 15-21% decline [8]
9. Which of the following portfolios would you be likely to invest in?
a. Portfolio with either a return of 5% or loss of 0% [0]
b. Portfolio with either a return of 15% or loss of 5% [2]
 c. Portfolio with either a return of 25% or loss of 10% [3]
d. Portfolio with either a return of 40% or loss of 15% [6]
e. Portfolio with either a return of 50% or loss of 20% [8]
10. Which one of the following four hypothetical portfolios would you feel most
comfortable with?
   Year 1 2 3 4 5  
a. Portfolio A 5% -1% 5% 6% 3% [2]
b. Portfolio B 14% -5% -3% 9% 9% [3]
c. Portfolio C 21% -9% -5% 17% 7% [6]
d. Portfolio D 27% -12% -9% 28% 6% [8]

11. Given the fluctuations of any investment portfolio, how long would you be willing to
wait for your investments to regain any lost value?
a. Less than three months [0]
b. Three to six months [2]
c. Six months to one year [4]
d. One to two years [8]
Total Score:
Your Total Score Your Investment Profile
3-37 points Conservative Investor
Your primary objective is preservation of capital
You cannot tolerate fluctuating returns
38-46 points Balanced Investor
You are willing to tolerate some market fluctuations i.e have a moderate
risk tolerance
You have a shorter time period for your investments to grow
47-55 points Growth Investor
You are willing to tolerate some market fluctuations
You are a relatively experienced investor who is looking for moderate
growth and diversification
56-75 points Aggressive Investor
You are a knowledgeable investor and not concerned about short term
fluctuations in the market
You have a long period of time before you will need to use these
investments

Risk tolerance function:

σ2
Utility Maximisation (f) = Ŕ− where, T= Risk Tolerance
T
Considering your score as Risk Tolerance (T), assess which portfolio maximises your utility
so that you select for investment.
Portfolio Expected Return (%) Standard Deviation (%)
1 7 10
2 8.5 13
3 10 20

If investor A has risk tolerance of 40 and B has risk tolerance of 70, which of the above
portfolios are suitable to investors A and B?
2. Given the following information.

Security Mean Return Standard Covariance with (%)2

(%) Deviation (%) A B C
A 11 2 4 10 4
B 14 6 36 30
C 17 9 81
What is the optimum portfolio if the lending and borrowing rate is 6%. Assume
Lintner definition of short sales. How would you answer change if standard definition
for short sales is assumed?