Financial Wellness with Richmond Kwame Frimpong: Knowing your personal risk profile (PRP) before you invest

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Richmond Kwame Frimpong

Risk Profiling does not only address the avoidance of risk, but also the ability to take calculated risks and manage same to achieve zero to minimal losses. It borders largely on knowledge of the types of risk you can be confronted with, the ones you may take voluntarily and the ones that may catch you unawares.

Risk-Profile

An investor’s risk-profile is snapshot of their (his/her) appetite toward risks in relation to investment returns. An investor’s understanding of his/her risk profile thus helps in determining the proper investment type to choose, and the asset to allocate for a portfolio in order to maximise investment returns or minimise investment losses.

There are three (3) types of investors in relation to risk: i.e., Risk Averse, Risk Neutral and Risk Lovers

  • A risk-averse investor, when faced with two investments with a similar expected return but different risks, will prefer the one with the lower risk.
  • A risk-neutral investor is indifferent to risk when making an investment decision.
  • A risk lover is willing to take on additional risk for an investment in order to earn higher returns.

Knowing your personal risk profile is thus necessary in determining the portfolio that best suits your investment decision and return expectations.

The scenarios below can guide you to determine your risk profile before you make any investment decision: 

Assuming company A is offering three products:

 

OptionsRateDurationCondition
Product 1  X %365 daysYou may lose your principal or double your principal at the end of the holding period.
Product 2  Y %365 daysYou may lose 50% of your principal or gain a 50% increment of your principal at the end of the holding period.
Product 3  Z %365 daysYou are assured of a 30% increment of your principal at the end of the holding period.

 

Concluding Scenarios:

If you chose Option 1, you are likely to be a RISK LOVER.

If you chose Option 2, you are likely to be RISK NEUTRAL.

If you chose Option 3, you are likely to be RISK AVERSE.

 

Investment Instruments to consider in a portfolio based on your risk profile:

Risk AverseRisk NeutralRisk Lover
Fixed Term DepositsFixed Term DepositsStocks
Treasury-BillsGovernment BondsMutual funds
Government BondsStocks of Blue-Chip CompaniesBonds of companies

 

Seek Help:

Contact your Investment Financial Advisor Today for a review or assessment of your investment risk profile before you close your next investment decision.

You may send comments, questions or suggestions if any to [email protected] and @richmondkwamefrimpong across all social media platforms

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