Risk Tolerance and Capacity Measurement: The StratiFi Approach
StratiFi calculates an investor's risk score using a comprehensive and dynamic approach that considers both the investor's risk capacity and risk tolerance. This method aligns with general best practices in risk measurement by providing a personalized risk score that reflects the investor's unique financial situation and emotional ability to handle losses.
Risk capacity is calculated based on the investor's financial ability to handle losses. It takes into account factors such as the investor's age, wealth, and the return needed from their investments. The calculation adjusts the risk capacity score based on the investor's financial situation compared to the average investor’s financial situation based on data from the federal reserve. Risk tolerance, on the other hand, is calculated based on the investor's emotional ability to handle losses. It considers an investor's expected return from their investments, and their tolerance for losses.
The overall risk score is then calculated as a blend of the risk capacity score and the risk tolerance score providing a comprehensive measure of the investor's overall risk profile.