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

Mr. Anil Deshmukh, 58, is a government employee retiring in two years. He says he is comfortable with equity volatility and would like an aggressive portfolio, but his only financial assets are a small provident fund balance and he has a dependent daughter pursuing higher education. Which approach should the adviser follow in setting his risk profile?

The adviser should base the risk profile on the lower of risk tolerance and risk capacity and explain this to the client. Anil is willing to take risk but has low capacity because of a short horizon, limited assets and dependents, so an aggressive profile would be unsuitable.

  1. AAccept his stated willingness and assign an aggressive profile
  2. BUse the higher of his tolerance and capacity so the portfolio meets his wishes
  3. CAverage the two scores to arrive at a moderate profile
  4. DBase the profile on the lower of risk tolerance and risk capacity, and explain the reasoning to himCorrect

Explanation

His willingness is high but his capacity is low given a short horizon, limited assets and dependents. The prudent practice is to let the lower of the two govern the recommended risk level and to document the discussion. Averaging can overstate capacity, and following willingness alone ignores suitability.

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