Investment Policy Analyst

Assess Risk Tolerance

The efficient frontier consists of forty asset allocations, each having the highest expected return for a given level of risk. Each allocation is optimal for an investor with a particular risk tolerance. The risk tolerance corresponding to each allocation is shown on the efficient frontier report. Once the risk tolerance of the investor is known, the allocation on the efficient frontier that matches the investor’s is selected. Utility theory provides a framework for calculating an investor's risk tolerance. IPA utilizes the simplest situation in which risk tolerance can be measured. It requires that an allocation decision be made between a risk free and a risky in­vestment. The figure below presents the screen display showing a risk tolerance calculation.