Question

What types of investors are risk-takers, risk-neutral, and risk averse? If you were assisting with financial planning, what kinds of questions would you ask an investor in order to help determine his/her appetite for risk? What types of financial assets would be more heavily weighted in a generic portfolio for each investor type and why?"

Answer 1

Investors under the age of 35 with regular income can be risk takers.

Risk neutral investors belong to the age group of 35 to 55.

Risk averse group should be investors above the age of 55 years.

Investors appetite for risk can be ascertained from questions relating to (a) age, (b) Employment details such as nature of job, monthly income, stabiity of job, (c) Marital status / number of dependants depending on culture and nationality, (d) Existing loans / liabilities and their tenure. etc.

For risk takers, bulk of the investment should be in Equity because they are young, their period of investment will be long and they have the ability to undertake risk and increase income over the years.

For risk neutral investors, the investment should be in both Equity and Debt. They wil require funds in the short term for buying residence, child education etc.hence the debt portion. They also require funds for their retired life hence the Equity portion.

For the risk averse people, bulk of the investment should be in Debt with a small portion in Equity. They require monthly income for their retired life and hence investment in Debt Funds.