In the risk section in an IPS, they always subjectively say either the client has low, moderate, above average, below average, high, etc… risk tolerance.
Where do I find a scale so I know what exactly “low” risk tolerance means or “high” risk tolerance means? Is “low” risk tolerance measured in standard deviations below a certain amount, ex: 5% portfolio standard deviation signifies “low” risk tolerance. Or is “low” risk tolerance measured in terms of what % of portfolio is allocated to equities?
Like how do I know what’s “low” or “high” risk tolerance? And low in terms of what? If a pension plan has “low” risk tolerance, is it “lower” compared to other pension plans or “low” in general.
I know what to look for when reading the situation. Example, if a pension plan has a large plan surplus and the company is in great financial condition, it has a higher ability to take on risk relative to other pension plans. But how does that translate to low, moderate, above average, below average, high, etc… risk tolerance. I don’t know how to translate what I’ve read into a “low, medium, or high” rating. In my opinion, that pension plan has pretty high ability to take on risk (because of plan surplus and company financial condition) but in another person’s opinion, that pension plan may have a low ability to take on risk (just because it’s a pension plan not a foundation). What’s the right answer?
I need a scale to know what those words mean…