The risk aversion characteristics of an individual depend on the individual's feelings about risk, his or her current financial situation (such as net worth), the prospects for financial gains or requirements (such as college expenses), and the individual's age. One way, therefore, to attempt to deduce the appropriate risk factor and utility function for wealth increments is to administer a questionnaire such as the one shown in Figure 9.5, prepared by Fidelity Investments, Inc. This gives a good qualitative evaluation, and the results can be used to assign a specific function if desired.
In the questionnaire, note that five items (numbers 1, 6, 7, 8, 9) concern the investor's situation, five others (numbers 2, 4, 5, 11, 12) concern the investor's investment approach (mainly characterizing the level of comfort for risk), one item characterizes the market, and one item asks about the value of a managed fund This questionnaire therefore reflects the notion that risk tolerance is determined both by internal feelings toward risk and by an investor's financial environment
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