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Updated on Jun 15, 2023Determine your risk profile using our very own risk profile test and discover the investing style that best suits you. The test consists of two parts with 21 questions in total. You can find out more about how we developed the test and the methodology behind it in the article below.
Your risk profile looks at how much risk you can afford to take on as an investor. It’s a key part of determining the asset allocation in your investment portfolio. It tells you how to balance the asset classes you invest in, i.e. stocks vs. bonds, as well as the type of assets in each class, i.e. low-yield treasury or municipal bonds vs. high-yield, junk bonds.
This risk profile test was developed by FinMasters. In writing our guide on how to calculate your risk profile, we’ve been reviewing a number of online risk profile tests. We felt that some key features were missing, so we’ve tried to provide something better.
Most other online tests don’t differentiate between your risk tolerance and your risk capacity. That makes it hard to tell how much of their results can be attributed to your psychological makeup and how much boils down to the reality of your financial situation. Our test tries to assess your risk profile based on both your risk tolerance and your risk capacity.
Your risk tolerance looks at how psychologically comfortable you are with risk and loss. We measure it with the Grable & Lytton Risk Tolerance Scale (G/L-RTS) test, which has proven reliable and robust. This is why financial advisers, researchers, and consumers use it to assess willingness to engage in financially risky behavior.
As for your risk capacity, the test looks at your objective financial situation and tries to assess how much loss you can afford to take without excessive impact on your quality of life and financial future. This assessment is based on your age, your income, and your investment horizon, among other factors.
Another gripe we had with the majority of the online tests was that they used a linear model. They would score the questions you’ve answered and then just add the results. We felt that this muddied the picture because we believe that different factors should be weighed differently.
For instance, your age should play a larger role in calculating your risk profile than your investment experience. This is all the more pertinent when you are older and your main objective is capital preservation.
We created a test that takes these different weights into consideration.
We adjusted some of the weights according to American investors. For example, we adjusted the weights of the income question according to the average household income in the US as well as the average household spending. Consequently, the results of this test might be a bit inaccurate for our readers from other parts of the world.
Nevertheless, we have explained our entire methodology below, so if you want to adjust the weights according to your own country or region, feel free to do so, and please let us know how it works out. We’d be very interested in the results!
To give you a final score, we multiply the results of the G/L-RTS with the multiplying factors given below.
The score of the G/L-RTS ranges from 13 to 47, with higher scores representing higher risk tolerances.
Here are the multiplying factors used with the risk capacity questions.
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