In financial markets, risk profiling of an individual helps financial advisor in identifying a person's ability to deal with risk at various level while investing. It is a duty of financial planner to focus on risk profiling before they suggesting a product to their client. Risk profiling generally divide individuals to certain category such as conservative, moderate, aggressive Investors. Risk profiling process of every people is varied due to environmental factor such as peer pressure, market sentiment, changing moods of individuals, and rising age.
Based on the assessment of client's tolerance to risk, Peter and Janet Li can be categorized as a risk indifferent person as they have the courage to take investment with high-return yet high-risk probability. In addition Peter and Janet Li prefer high growth investment with a middle ground of risk. Apparently, Peter and Janet Li’s concept of high-return with middle ground risk are not in line, it is impossible for the them since high return investment requires high risk as well (consistent relationship). Whereas the tolerance is inversely related to the risk class; thus, the higher the risk, the lower the tolerance.
According to Graham's theory, Peter and Janet li can be classified as moderate investor. Based on Graham’s Theory a moderate investor is bias towards income producing but expecting more growth in investments than conservative investor. They concern about capital growth and focus on maintaining to preserve their assets as well. This proven by the questionnaires answered by them, Peter and Janet Li would cut their losses and transfer their funds into more secure investment sectors (such as bonds or debentures) if their portfolio value has decreased in value by 20% after six months after placing investment.
Furthermore, Peter and Janet Li have experienced high-risk investment in the past, therefore they know that high risk investment generally have a small accessible liquidity, as the result they...
Please join StudyMode to read the full document