Quiz: Determine Your Investment Risk Profile

By Stock Research Pro • September 1st, 2009

When strategizing to achieve their financial goals, investors need to determine the appropriate mix of investment alternatives that can provide the desired level of return while keeping risk at a tolerable level, given their risk profile. Investment risk describes the chance that the actual return they will receive from an investment will be different (lower) from what they expect. When making financial decisions, investors need to consider such factors as their age, income, goals, and comfort level with the various types of investment options in order to arrive at a portfolio mix that makes sense for them.


Types of Investment Risk

Some of the key risks to consider when making investment decisions include:

Market Risk: The risk that an investment, such as a stock, will decline in value, leaving the investor with a capital loss.

Inflation Risk: A worthwhile investment must provide a return that, at minimum, keeps pace with the rate of inflation. Investments that do not achieve this reduce purchasing power.

Credit Risk: When considering debt instruments (such as corporate bonds), there is a risk that the issuing entity may not be able to meet its financial obligations, in which case investors can lose their original capital and expected interest payments.

Liquidity Risk: The liquidity risk of an investment concerns the possibility that the investor will not be able to get out of the investment when they want to forcing the investor to hold onto the asset or to sell at a reduced price.


Risk Tolerance Drives Investment Allocation

Risk tolerance is a relative thing for investors. While all rational investors look to minimize their investment risk, some investors can handle risk better than others. Generally speaking, the more risk an investor is willing to take on, the greater their potential returns.

The investment risk calculator below asks a number of basic questions to help you determine a portfolio mix that might make sense for you. The calculator looks at your risk tolerance from a high-level. It is recommended that you work with an investment advisor for a more detailed analysis and financial planning.

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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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