IA Tutorial 6 Week 7

Katherine is an investor and she wants to ensure that

there is $55,000 in cash in the account on December 31, 2020.

Classify this statement according to where it fits in the

objective-constraints policies framework.

• a. Constraint, horizon

• b. Constraint, regulation

• c. Constraint, liquidity

• d. Constraint, taxes

2. In order for an investor to specify his/her investment objectives,

the investor should identify his/her .

• a. constraints and return requirement

• b. constraints and asset allocation

• c. return requirement and risk tolerance

• d. asset allocation and risk tolerance

3. The following is not a reason for investing:

• a. to provide for retirement.

• b. to fund higher levels of current consumption

• c. to fund higher levels of future consumption

• d. to fund children’s education needs

4. The statement – ‘risk drives expected returns’ refers to the notion that:

• a. an investor will require a higher rate of return the higher the perceived riskiness of an asset

• b. an investor will require a lower rate of return the higher the perceived riskiness of an asset

• c. markets over-react to news

• markets under-react to news

5. Define risk profiling.

Answer explanation

The process of understanding an investor's risk tolerance, investment objectives, and ability to bear risks. It involves assessing how much volatility an investor can handle, as well as their investment goals and timelines.

A psychometric survey helps _____ an investor's risk tolerance through a series of structured questions that assess their reactions to different financial scenarios.

The responses from a psychometric survey help _______ their comfort level with risks and investment losses.

The survey typically includes questions about financial situations, risk preferences, and investment behavior under varying ______ conditions.

7. Suggest some ways to improve the effectiveness of a risk tolerance questionnaire.

•  Ensuring clear and simple language to avoid confusion.

•  Including a range of scenarios to accurately assess behavioral responses under different market conditions.

•  Incorporating questions that explore both emotional and cognitive responses to financial risks.

•  Using dynamic scoring to offer nuanced risk profiles, rather than just simple categories.

What constraints should we consider when making recommendations?

• Liquidity

• Time horizon

• Tax concerns

• Legal and regulatory factors

• Unique circumstances