ANALYZE YOUR FIVE DIMENSIONS OF RISK CAPACITY
A risk capacity survey will help you determine your individual and unique risk capacity. Five dimensions of your risk capacity will be thoroughly measured, resulting in a score and corresponding index portfolio. These risk capacity dimensions include time horizon, investment knowledge, net income, net worth, and attitude toward risk. This is your single most important contribution to the investing process, resulting in an investment policy statement that will provide the guidelines for your financial future.
In order to optimize returns, institutional investors should take on as much risk as the Risk Capacity allows. The problem is that most investors, both institutional and individual, invest without a clear understanding of risk or they invest with an improper measure of how much risk is right for them.
Based on five specific dimensions unique to each institution, the Risk Capacity score is a numeric measure that takes into consideration the investment time horizon and liquidity needs, size of assets and net income, as well as the board's collective investment knowledge and attitude toward risk. IFA's Risk Capacity Survey enables institutional
investors to learn the amount of risk that is right for them and then begin Capacity Exposure Optimization — CEO Investing. This is the process that best matches institutions with portfolios. At the intersection of risk capacity and risk exposure sits
a portfolio that is optimal for each investor, and will therefore
generate optimal returns. This is accomplished through exposure
to the five dimensions of risk that have shown to be responsible
for as much as 97% of stock market returns. They are: market,
size and value for equities, and term and default for fixed
income. Each one of IFA's 20 Index Portfolios carries a level
of risk exposure that is aligned with a risk capacity score.
Additional Charts and Graph from Step 10