INVESTMENT PLANNING I: ASSESSMENT OF CLIENT RISK TOLERANCE

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INVESTMENT PLANNING IASSESSMENT OFCLIENT RISK
TOLERANCE
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RISK, THE THEORY OF CHOICE UNDER UNCERTAINTY, AND
FINANCIAL PLANNING

• The Importance of Risk Tolerance in Financial
  Planning
• Definitions of Risk
• Risk and Time
• The Theory of Choice Under Uncertainty

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RISK AND HUMAN BEHAVIOR

• Classical Utility Theory Propositions
• ? Cet. par., people obtain satisfaction from
  consumption.
• ? Cet. par., people suffer dissatisfaction from
  risk-taking.
• ? Attitudes toward risk-taking fall into one of
  three categories
• Risk-seeking
• Risk-neutrality
• Risk-aversion

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RISK AND HUMAN BEHAVIOR

• Classical Utility Theory Risk Attitudes
• ? You are offered the following
• 10 with certainty, or
• A 90 chance of 0, and a 10 chance of 100
• Which do you prefer?

Utility of Wealth
Utility of Wealth
Utility of Wealth
Wealth
Wealth
Wealth
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RISK AND UTILITY THEORY IMPLICATIONS

• Human Behavior
• The Markowitz (Portfolio) Rule
• The Risk-Return Tradeoff

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CLASSICAL UTILITY THEORY CAVEATS
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DETERMINANTS (?) OF ONES ATTITUDE TOWARD
MONETARY RISK-TAKING

• Micro-Factors

Macro-Factors
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ASSESSMENT OF CLIENT RISK TOLERANCE

• Methods for assessing client risk tolerance
• Interviews
• Observation and inference
• Survey instruments