Developing the Questions for the Risk Assessment Questionnaire
In developing the individual questions and answers to the Risk Assessment Questionnaire, Morningstar combines principles of prudent financial planning along with mathematical probability testing. For example, for the short-term risk attitude questions, we calculated the probabilities of investors losing money over different time frames, using our own asset-class return assumptions. The survey and scoring system were also fine-tuned based on an analysis of a sample of the thousands of possible scenarios the survey could generate. The seven questions your clients will answer in this risk survey are designed to elicit their true risk profiles.
Scoring the Risk Assessment Questionnaire and Checking for Inconsistencies
Answers are assigned points as follows:
A=5 B=4 C=3 D=2 E=1
We then calculate four risk tolerance scores: a time horizon score, a long-term goals score, a short-term goals score, and an overall score, and map them to one of five recommended asset mixes: Very Conservative, Conservative, Moderate, Moderately Aggressive, or Aggressive.
Time Horizon, Questions 1 & 2
Points |
Portfolio |
2 |
Very Conservative |
3-4 |
Conservative |
5-7 |
Moderate |
8-9 |
Moderately Aggressive |
10 |
Aggressive |
Long-term Goals and Expectations, Questions 3-5
Points |
Portfolio |
3-4 |
Very Conservative |
5-7 |
Conservative |
8-10 |
Moderate |
11-13 |
Moderately Aggressive |
14-15 |
Aggressive |
Short-term Risk Attitudes, Questions 6 & 7
Points |
Portfolio |
2 |
Very Conservative |
3-4 |
Conservative |
5-7 |
Moderate |
8-9 |
Moderately Aggressive |
10 |
Aggressive |
Overall Risk
Points |
Portfolio |
7-10 |
Very Conservative |
11-17 |
Conservative |
18-24 |
Moderate |
25-31 |
Moderately Aggressive |
32-35 |
Aggressive |
The overall risk score is mapped to one of the five risk profiles.
At this point, you should check scores in each section for internal consistency to ensure that your client has a realistic set of expectations and attitudes given his or her circumstances. You can go back to the Risk Assessment Questionnaire if desired. Alternatively, you can choose to select a different risk profile, if appropriate. The client's risk profile is used to provide a default position/allocation on the Efficient Frontier.
See Also