How to match client risk tolerance to portfolio performance charateristics
I am building a software system to help out a friend who manages private client money. I am researching how, once we capture the new clients risk tolerance we select a portfolio that has matching characteristics. This article - https://static.arnaudsylvain.fr/2017/03/The-Grabl… has research on matching the Grable and Lytton risk-tolerance scale to performance, but not in a lot of detail.
Does anyone know of other research or have information that would lead me to have an understanding that would then allow me to test the performance parameters of a portfolio over time to check it remains within the client's stated risk tolerance? For example would stated ranges for Sortino ratio for constituents of a portfolio be useful in matching to a risk tolerance, as a part of a larger number of such tests. I.e. I'd like to go beyond the simple classification of Equities as Risky and Treasury Bonds and cash as not risky.
Thank you for reading
Hi olddave, any of these topics helpful:
More suggestions...
I hope those threads give you a bit more insight.
Thank you. Interesting resources, but not strong on specifics for matching retail client risk tolerance to portfolio performance characteristics. I'm primarily a data scientist, so like to deal with hard facts, I might be in the wrong forum me thinks.
couple ideas here, none of which are relatively new:
the difficulty is in the 2nd one, because humans have tremendous recency bias and I have yet to see a questionnaire that can be broadly used and will accurately get to the core of what a client's risk tolerance would be. in bull markets it's high, in bear markets it's low. since humans are imperfect, you cannot design a perfect system for this. in essence: garbage in, garbage out
Yes, portfolio construction is easy, we started with MPT, the only tricky part is storing the 15Bn Pearson Correlations. We use Sortino instead of Sharpe ratios. That is just the starting point.
The Grable and Lytton risk-tolerance scale is well documented and trialled. But these things are not what I asked about.
I don't think you understand, what I'm telling you is that risk tolerance is not an easily quantifiable thing, making it difficult to put into statistical models. I'm familiar with grable/lytton scale, and I will tell you that questionnaires such as this are flawed by their design. it's the best attempt at quantifying this, but it's by no means a great input.
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