Risk profile is an evaluation of your willingness and ability to take risks. A risk profile is used to help determine the types of investments you should have in your portfolio. It is made up of three factors: Risk Capacity, Risk Tolerance and Risk Required. All three factors are used to determine which investment is most suitable for you.
Risk capacity measures the maximum amount of risk you can afford to take, the higher your capacity (i.e., higher amounts of net worth, income, and pension), the higher risk capacity you can take. The higher your risk tolerance, the more comfortable you are with higher fluctuations in your investments. Finally, there is risk required. This is the amount of risk you need to take to meet your financial goals. Your financial adviser will ask questions to determine your risk profile so you build your savings with the right products and sleep comfortably at night.
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