Target risk is the desired level of risk associated with an investment or portfolio. It is typically expressed in terms of the potential return and volatility of an investment.

Factors Affecting Target Risk:

• Investor’s risk tolerance: Investors’ risk tolerance determines their willingness to accept different levels of potential return and volatility.
• Investment goals: Investors’ goals and time horizon influence their target risk.
• Economic conditions: Economic factors, such as interest rates and inflation, can affect target risk.
• Market conditions: Market volatility and expected returns can impact target risk.
• Investment strategy: The investment strategy used dictates the target risk level.

Setting Target Risk:

1. Assess risk tolerance: Determine your willingness to accept potential losses.
2. Consider investment goals: Consider your time horizon and financial goals.
3. Analyze economic factors: Consider interest rates and inflation.
4. Consider market conditions: Evaluate market volatility and expected returns.
5. Select an investment strategy: Choose an investment strategy that aligns with your risk tolerance and goals.

Example:

An investor with a high risk tolerance and a long time horizon might have a target risk of 10-15%. This indicates that they are comfortable with the potential for high returns but also accept a higher level of volatility.

Target Risk Examples:

• Low-risk portfolio: Target risk of 3-5%, suitable for retirees or conservative investors.
• Moderate-risk portfolio: Target risk of 6-8%, appropriate for investors with a moderate risk tolerance and a medium-term time horizon.
• High-risk portfolio: Target risk of 9-12%, suitable for aggressive investors with a long time horizon and a high risk tolerance.

Note:

Target risk is not a static value and can fluctuate over time as market conditions and personal circumstances change. It is important to regularly review and adjust your target risk as needed.