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Asset allocation in investment
Asset allocation in investment

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2.1 Identifying client attitude to risk

Read the FSA (now the FCA) factsheet Attitude to risk - an adviser prompt [Tip: hold Ctrl and click a link to open it in a new tab. (Hide tip)]  and answer the question in Activity 2.  

Activity 2 Types of investor risk

Timing: Allow around 20 minutes for this activity.

List three aspects of risk - other than standard deviation or historic volatility – which are relevant to the investor and are mentioned in the FSA factsheet.

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The three aspects of risk mentioned in the FSA factsheet that are relevant to investors are, economic and political risk relating to factors such as interest rates, the inflation rate, and possibly exchange rates.

The ability to understand risk. Financial literacy (also known as financial capability) is part of the UK government’s strategy to help potential investors make risky investment decisions in as informed a way as possible.

The third is to do with expectations. As mentioned above, the past is not a good predictor of the future. This is why investment management firms and advisers spend a lot of time forecasting future returns and risks for different asset classes.