WM_MHLWLM70 - Part 1.1 The purpose of a risk questionnaire...

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Part 1.1 The purpose of a risk questionnaire is to help with the first step of the financial planning process, which is to collect and assess information about the client. They are useful to determine an investor’s attitude to and understanding of investment markets & how they operate. Risk analysis is designed to enable the financial planner to select the right mix of investments to achieve a specific balance of risk and return for an individual investor. There are hundreds of risk questionnaires that can be found on the internet. They typically involve between 8 and 25 questions. They include various questions about investors’ past experience with investments, past experiences with risk taking, feelings involved or emotions evoked when risk taking, hypothetical situations and choices between hypothetical investments, products or scenarios. Most of the questionnaires include questions about investors’ time horizons. Some of them ask what stage of life the investor is at, however several fail to include this. Some of the surveys ask about the investor’s goals, but again, several fail to include this type of question. Risk profiling questionnaires start with a brief introduction, explaining why the questionnaire is necessary and what information will be gained from it. It is important for investors to be aware that risk and return are closely related, such that a lower risk profile rating has the potential to reduce long term returns. When investing, it is important to consider the level of risk as well as the return on an investment. Often people only think about the chance of investments falling in value and forget that a key issue is also the possibility that your investments may not achieve your stated goals & objectives Risk profiling questionnaires are designed to assist in making investment decisions in view of an individual’s circumstances and investment goals. The ultimate purpose is to determine which assets in which to allocate the investor’s money. Some types of investments are more suitable to some investors than others. Assigning the wrong investments can be distressful (if the portfolio has a higher risk than what the investor is comfortable with) or frustrating (if the portfolio has a lower risk than the investor wanted and thus they miss out on high return opportunities). Understanding risk tolerance allows for a better judgment of where money should be invested. Another important fact to take into consideration is that risk means different things to different investors. For some, investment risk means the likelihood of a loss of capital, while for others it is the level of volatility of an investment, or the risk of an asset not producing enough to live on. So this means that we can't simply ask an investor about how risk tolerant they are, as it is a relative term that is subject to interpretation. This is why there is a need to ask questions about past experiences and hypothetical scenarios, in order to determine a more objective and standardised level
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WM_MHLWLM70 - Part 1.1 The purpose of a risk questionnaire...

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