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Knowledge

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Step 10: Risk Capacity

Dimension Five Investment Knowledge An individual who understands several key concepts that impact investing, such as the failure of active management, the Random Walk Theory, the Efficient Market Hypothesis, the Five-Factor Model, and Modern Portfolio Theory has a greater capacity for risk than someone without this understanding.

Sample Risk Capacity Survey Question: The performance of stock pickers must be examined on an adjusted basis. When comparing the returns of a stock picker’s portfolio to an appropriate index, which factors must be considered before determining if the stock picker has beaten the index? A. Proper accounting of returns, including cash flows in and out of the account B. Exposure to market, size and value risk of both portfolios C. A statistical analysis of the difference in returns with a measure of the significance of the difference, such as the t-stat D. Standard deviations or volatility measurements E. All of the above The following pages display portraits and provide descriptions of four risk capacities, which consider age, family composition, activities, careers, and lifestyles. These movie poster style portraits are designed to capture the characteristics of individuals who score 100, 75, 50, or 25 on a risk capacity survey (ifarcs.com).

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