Risk Tolerance Questions to Best Determine Client Portfolio Allocation Preferences?

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Executive Summary •The literature on risk tolerance overwhelmingly justifies the use of questionnaires based on validity and reliability or psychometric testing but there has been little research examining the relation between questions and actual investor portfolio behavior. •This study examines risk tolerance questions based on economic theory, prospect theory and client self-assessment to determine the extent to which they explain variation in portfolio allocation preference and recent investment changes. •I conclude that risk tolerance questions based on loss aversion and self-assessment should be used when determining the portfolio allocation of clients. •While questions based on economic theory should theoretically be the best measure of a client’s preference for risky assets, my results indicate that it is not very useful when both loss aversion and self-assessment questions are included in a risk tolerance questionnaire. •Simple changes such as waiting until the end of me
Original languageEnglish
Pages (from-to)34-42
JournalJournal of Financial Planning
StatePublished - Feb 2012


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