Investors are concerned with holding an optimal portfolio.
Investors are concerned with holding an optimal portfolio. Consider the choices an investor can make. How will the portfolio choices differ for a conservative investor? What about an aggressive investor? Which type of investor would you most likely identify with?
Sample Answer
Portfolio Choices and Risk Tolerance
Investors aim to construct portfolios that balance potential returns with risk tolerance. Here’s how asset allocation choices might differ for conservative and aggressive investors:
Conservative Investor:
- Risk Averse: Conservative investors prioritize capital preservation and seek to minimize risk.
- Asset Allocation: Their portfolios will likely have a higher weighting of:
- Fixed-income investments: Bonds, certificates of deposit (CDs), money market accounts (low risk, predictable returns)
- Stable-value funds: Invest in low-risk assets like cash equivalents
- Blue-chip stocks: Stocks of well-established companies with a history of paying dividends (moderate risk, moderate returns)
- Diversification: They will likely diversify across asset classes to mitigate risk.