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

Mr. Raghav Menon, 58, is a government-school principal with a stable pension-eligible job, no loans, and ample savings. In the risk questionnaire he says even a 5% fall in his portfolio makes him lose sleep. Which approach is most appropriate for the adviser in setting his risk profile?

The adviser should adopt the lower of risk capacity and risk tolerance, giving a conservative profile. Although Mr. Menon can financially afford losses, he is psychologically uncomfortable with small falls and may sell in panic. Taking the more restrictive measure protects him from harmful behaviour.

  1. AUse his high risk capacity and assign an aggressive profile
  2. BAverage the two scores and assign a moderate-risk profile regardless of the gap
  3. CIgnore the questionnaire because it is subjective
  4. DUse the lower of risk capacity and risk tolerance, so assign a conservative profileCorrect

Explanation

When willingness and ability conflict, the standard approach is to base the profile on the lower of the two. His high capacity does not override his low tolerance, since he may panic-sell. Averaging hides the mismatch, and the questionnaire cannot be ignored.

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