In talking about the efficient frontier, the book says “once the investor’s risk tolerance is determined and quantified in terms of std deviation, the optiomal portfolio can be identified”.
How is this done – how do PMs go about quantifying or determining someone’s level of risk aversion in a real world setting ??
I can’t imagine investors come in knowing, let alone understand, that they want a portfolio variance of, say, 5%. How is the sense of risk aversion translated into a number when building an investor’s portfolio ?
Just curious how investor’s and their money managers actually go about distinguishing levels of risk.
Thanks