One of the most important considerations with any investment is to balance your attitude to risk with your desire for positive returns. After making sure that they have a comprehensive picture of your personal and financial circumstances, your financial adviser will ask you a series of questions to determine what your attitude to investment risk is. This is known as risk profiling.
What is your attitude to risk?
Risk profiling measures the balance between risk and return that you are prepared to accept.
How is risk measured?
All investments involve some risk. The most common measure of risk is the extent to which the value of the assets in an investment moves up and down over a given period, relative to their long-term average value. This is often referred to as the volatility.
Volatility is a statistical method that measures how much a series of values move up and down around its average. The higher the volatility number, the less consistent the historical performance of an investment has been.
Investments with higher volatility are considered to be riskier than those with lower volatility. Although their potential for upward swings is greater, so is their equivalent potential for downward movement.