Assessing Risk Tolerance for Asset Allocation

Droms, William G.; Strauss, Steven N.
March 2003
Journal of Financial Planning;Mar2003, Vol. 16 Issue 3, p72
Academic Journal
This article proposes a risk tolerance questionnaire that develops asset allocation guidelines in financial planning as a dual function of risk tolerance and time horizon. One of the key steps in investment planning for an investment advisor is the assessment of a client's risk tolerance so that a portfolio can be structured that is consistent with the client's willingness to trade risk for reward. A review of the questionnaires in use as of March 2003, shows that virtually all of them focus on the asset allocation decision--that is, the process of distributing portfolio investments among the various available asset categories such as money market instruments, bonds, stocks, real estate and other assets. The result of the risk tolerance questionnaire typically is a recommended percentage allocation to each of these asset classes. Virtually all experienced financial planners and investment managers would agree that a questionnaire by itself cannot possibly lead directly to a definitive asset allocation plan.


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