Definition of Risk Assessment
- Risk assessment is an evaluation method used to understand an investor’s risk rating, which helps them come up with a suitable investment strategy to achieve their financial goals.
What Impacts Risk Assessment?
- Financial risk assessment evaluates where a client stands in regards to taking risks. This can be understood through three approaches, including the client’s attitude towards risk, the tolerance for risk, and the capacity for risk.
- The client’s attitude towards risk describes the client’s particular feelings and understanding of risks and how it may affect them financially.
- The client’s tolerance for risk measures how much change or instability a client can bear to undertake for a particular investment, considering past performance and future expectations.
- The client’s capacity for risk is the amount of risk a client must endure to achieve the company’s financial obligations.
Why is Risk Assessment Important?
- With a risk assessment, clients can create an overall risk profile and invest their capital in inappropriate assets with risks that they can handle.
- By being aware of their attitude, tolerance, and capacity for risks, clients are provided with a direction for future financial developments and decisions.
- With a thorough assessment, advisors layout documented evidence which may help with future uncertainties.
- Potential risks may also be protected without disrupting a client’s growth potential.
- Clients and their advisors form more trustworthy relationships through this process.
Risk Assessment in Practice
- Overall, the process of risk assessment is to assess a company’s vulnerabilities to ensure that these risks are hedged for the company’s future.
- When deciding to invest in a portfolio, it is vital to understand the kinds of fluctuations that may occur in the stocks that seem reasonable to invest in today.
- Diversifying these risks will help in controlling uncertainties that may affect the overall investment portfolio in the future.