Risk profile
Published:Wednesday | June 29, 2011 | 12:00 AM
Financial economists tend to analyse investors' approach to risk by categorising investors into three types - risk neutral, risk loving and risk averse.
A risk-neutral investor looks only at the expected return on an investment and does not explicitly factor risk into his choices, and goes for the investment with the highest expected return.
The risk-loving investor looks only at the risk of the investment and goes for the investment with the highest risk. The risk-averse investor looks at the trade-off between expected return and risk and requires a higher expected return to take on higher risk.
The majority of financial models tend to model persons as being risk-averse investors.
However, it remains an open question as to whether or not this is an accurate representation of investor behaviour. For example, while we think of Caribbean people as being risk averse, many persons play the lottery, which would be an example of risk-loving behaviour.
Discussions with a number of investors in CLICO and British American financial products suggest a risk-neutral approach to investing, where they only looked at the expected return. What kind of investor are you, and what type of investments best fit your profile?