Skip to content

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

Meera, 58, a government school teacher in Pune, is two years from retirement, has a pension, no loans, and says she is 'comfortable with high volatility' after gaining in a bull market. Her risk-profile questionnaire shows high willingness but low ability. What should the investment adviser do when finalising her risk profile?

The adviser should set the overall risk profile at the lower of the client's risk ability and risk willingness, and explain this. Meera's short time to retirement limits her ability, and her enthusiasm may reflect recency bias, so a high-risk profile would be unsuitable.

  1. AAdopt the high willingness score since the client's own stated preference prevails
  2. BAverage the two scores and ignore the age factor
  3. CBase the overall risk profile on the lower of ability and willingness, and explain this to herCorrect
  4. DClassify her as aggressive because she has no loans

Explanation

Where risk willingness and risk ability conflict, the prudent approach is to adopt the more conservative of the two for the overall risk profile and to discuss the reasoning with the client. Her short horizon limits ability, and willingness built on a bull-market experience may be overconfidence (recency bias). Averaging or following willingness alone could expose her to unsuitable losses.

Did you get it right without looking?

One question tells you little. A timed set on Risk Profiling for Investors shows your real accuracy, how long you take and where you lose marks.

Practise Risk Profiling for InvestorsFree diagnostic mock

More Risk Profiling for Investors questions