Risk

Risk Tolerance is affected by :

1. Source of wealth

2. Measure of wealth

3. Stage of life

There are two factors that affect risk tolerance. Willingness and Ability.

Psychological Profiling

TF

• Rational Investor
• Risk Aversion
• Asset Integration

BF

• Behavioural Biases
• Loss Aversion
• Segregation by goals

Different Type Of Investors

• Cautious
• Methodical
• Individualistic
• Spontaneous

Investment Policy Statement

Consist of :

1. Return Objective
2. Risk Tolerance
3. Constraints

Also :

• Operational guidelines for portfolio construction
• Agreed basis for monitoring and review

Constraints

1. Liquidity
2. Tax
3. Legal and regulatory
4. Unique

Strategic Asset Allocation

Find sets of assets that meets with guidelines set in the IPS .

Advantages Of Monte Carlo Approach

• More accurately portrays risk/return trade off
• Trade offs between long term and short term goals
• Realistic modeling of taxes
• Better suited to asses multi period effects