You may be happy with both your risk-profiling and investment processes, but how can you trust they are being suitably and objectively combined for the best investor outcomes?
An investor's risk profile should be mapped to a level of suitable portfolio risk (and hence to asset allocations) using quantitative risk bands. The Oxford Risk approach is unique in applying a robust academic methodology to this process.
Mapping is the means of matching investors and investments, determining the right level of investment risk for a given investor’s risk profile.
A risk profile determines the right level of risk for each investor on a scale from ‘low’ to ‘high’. Risk mapping assigns a specific quantitative measure of risk to each profile on this scale.
The mapping process comes in two parts. A risk profile is first mapped to a pre-determined risk band – the long-term risk levels that are right for the overall investible assets for each risk profile. Each model portfolio or asset allocation can then be assigned an absolute level of long-term risk to determine which band they fall in.
Oxford Risk's mapping process thus aligns model portfolios or funds to investor risk profiles, ensuring end-to-end consistency of your suitability processes.
Account for both risk tolerance and a quantified measure of risk capacity. Risk capacity defines the risk an investor is able to take on; risk tolerance defines how much risk an investor is willing to take. Together they determine the right level of risk for each investor’s investible assets.
Define suitable risk bands using utility functions and indifference curves. A utility function allows us to mathematically model how to use a risk profile by quantifying the risk an investor is willing to take to obtain each level of reward. An indifference curve then maps all combinations of risk and return that an investor treats as equally preferable. The ‘optimal’ portfolio is found where the indifference curve meets the universe of available portfolios.
Limit risk exposure for investors with certain behavioural traits. If an investor has low composure, it is likely that a risk level above their long-term risk tolerance will make them emotionally uncomfortable, and so it is prudent to limit the effect of high-risk capacity on the final profile. Other behavioural traits can also affect the expression of a risk profile; see our behavioural traits page for more details.
Mapping ready-made portfolio solutions can enhance their visibility and usability for potential investors. Having portfolios accurately mapped to Oxford Risk's risk profiles helps investment managers and platforms promote appropriate solutions, rather than relying on best guesses or intuitive approximations.
Oxford Risk offers this mapping process as part of the overall suitability toolkit or as a standalone service.