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

Mrs. Kavita Rao, 58, plans to retire in two years and needs a corpus for her living expenses. She says she can 'sleep well' even if her equity portfolio falls 40%. Her risk tolerance is high, but her capacity to take risk is low. For asset allocation, the adviser should primarily:

The adviser should let the lower risk capacity limit equity exposure and explain the reasoning to the client. Where tolerance exceeds capacity, the more conservative of the two prevails, because losses beyond capacity could derail essential goals such as retirement spending.

  1. AFollow her stated tolerance and invest mostly in equity
  2. BAverage tolerance and capacity and allocate exactly 50% to equity
  3. CLet the lower risk capacity cap the equity exposure, and explain this to herCorrect
  4. DIgnore capacity because tolerance is more recent information

Explanation

When risk tolerance exceeds risk capacity, the more conservative measure should govern, since a loss beyond capacity would jeopardise essential goals. The adviser should document and explain it to the client. Averaging has no basis, and tolerance cannot override capacity.

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