Week 4 - Client Preferences & Behavioural Finance

Question 1

What are the three methods of risk profiling?

Answer 1

Method 1:
Exposure of financial capital should be based on exposure of human capital

Method 2:
Risk Set-Point

Method 3:
Questionnaire

Question 2

Describe Method 1 of risk profiling

Answer 2

Risk profile of financial capital should be evaluated on the basis of human capital risk

Views wage as an investment that is either a stock or bond in relation to job security and market conditions

Stock job = less secure
Bond = More secure

portfolio theory applies

Question 3

Describe method 2 of risk profiling

Answer 3

Risk set-point method requires the following steps:
1. Identify goals
2. Differentiate between need and wants
3. Needs achieved through low-risk assets
4. Wants achieved through higher-risk assets

Where safe zone ends and risk begins = Risk set-point

Question 4

Describe method 3 of risk profiling.

Answer 4

Use of a questionnaire

Assesses the following areas:
1. Life stage-related questions
2. Financial resources-related questions
3. Emotional risk related questions

Question 5

What are the potential cons of risk profiling method 3?

Answer 5

1. Self reporting on behaviour and financial literacy
2. Behavioural bias
3. Number of questions
4. Poor understanding of technical terms