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NISM Certifications · NISM-Series-X-B: Investment Adviser (Level 2) · Risk Profiling for Investors

An investment adviser profiles a client, Mr. Raghavan, aged 58, who is retiring in two years. His risk tolerance questionnaire shows a high score because he enjoyed past equity gains, but his portfolio is needed to fund 80% of his post-retirement expenses and he has no other income. Which approach is most consistent with sound risk profiling practice?

The adviser should base the overall risk profile on the lower of risk capacity and risk tolerance. Mr. Raghavan's short horizon and dependence on the portfolio for expenses limit his ability to bear losses, so a conservative allocation is appropriate despite his high tolerance score.

  1. AAdopt the high risk tolerance score as the final risk profile, since it reflects his stated attitude
  2. BSet the overall risk profile by the lower of his risk capacity and risk tolerance, resulting in a more conservative allocationCorrect
  3. CSet the overall risk profile by the higher of his risk capacity and risk tolerance to maximise returns
  4. DIgnore risk capacity and base the profile only on his past investment experience

Explanation

Risk profiling combines willingness (tolerance) and ability (capacity) to take risk. Where the two conflict, the adviser should be guided by the lower one. Mr. Raghavan's short horizon and dependence on the corpus for expenses give him low capacity, so the high tolerance score should not drive the allocation. Using the higher measure would expose him to losses he cannot absorb.

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