Investment Tolerance Score

Investment Risk Tolerance Score has been obtained to be 27, which is a medium score according to the online risk assessment quiz developed by Grable and Lytton (1999).

Factors used to determine the risk profile.

            Thirteen questions with multiple choices were asked to evaluate the investment risk tolerance score. The assessment measures one’s chances of taking high, medium, and low risks. Besides, it evaluates the choices that an individual makes regarding finances in the event of a dilemma or a disaster. For instance, the third quiz measures one’s decision regarding a planned “once-in-a-lifetime” vacation that is about to be crippled by losing a job. In this case, one would score a 1% if the answer is ‘cancel the vacation’; 2% if the answer is ‘take a much more modest vacation’; and 3% if one chooses to go as scheduled, with the reason that one needs to start looking for a new job while on the vacation. The maximum score of 4% for this quiz will be awarded if one chooses to extend the vacation, reasoning that the opportunity might be one’s last chance to travel first-class.

Agreement with the score

            I agree with the results obtained from the test, which gave me a score of 27. This figure indicates a moderate risk tolerance level. The value confirms the fact that I am a cautious investor. This moderate attitude is important given the current economic uncertainties in the consumer financial marketplace.

How to Invest an Inherited Lump sum

            Given a lump sum inheritance of $300,000, I will invest 10% in high-risk investments, 30% in medium-risk investments, and 60% in low-risk investments.

High-risk investments

            The 10% of the lump sum in the high-risk investments is equal to $30,000. This money can be used to fund a gold mining venture using reliable and experienced geologists. The chance of succeeding in this venture is approximately 25%. If the minerals are discovered, and the mining process is done without interruptions, the venture has the potential of paying back between 100 to 150 times the initial investments. At the end of the process, the $30,000 can earn between $3,000,000 and $4500, 000 or lose the whole amount.

Medium-risk investment

            Half of the medium-risk investments will go to corporate bonds in two or three different companies. I will prefer bonds to stocks because bonds are safer than stocks. For instance, in the event of the company in which the bonds have been invested going into bankruptcy, bondholders are paid earlier before the company’s stockholders (Bradley & Roberts, 2015). The $90, 000 in a corporate bonds, with an interest of 2.45% per annum, will generate $2205 every year. In 20 years, assuming the bond interest rates remain almost constant, the total earning from the corporate bonds will be $44,100.

Low-risk investments

            The main areas of low risks in which the inherited lump sum can be invested are the treasury bonds, direct business ownership as well as in real estate. Treasury bonds are risk-free, and the American government issues them with a very chance of default. These bonds make interest payment semi-annually, thus generating more money. The direct business ownership can be in the form of a restaurant in an urban center that has a high population of people. Quality should be excellent to attract a high number of customers. Investment in real estate in an industrialized urban area is a low-risk venture given that the value of land and structures is on the rise.

            Out of the 60% of the total lump sum, $100,000 can be invested in the treasury bonds. Using a 3.00 percent coupon in September 2018, the total investment in the treasury bonds would generate interest of $3000 every year. Assuming that the 3% coupon remains constant, the total interest that will have been generated in the next 20 years will be $60,000, a value that is more than half of the initial investment.

            In conclusion, the Investment Risk Tolerance Score is moderate, implying that I am a cautious investor, as opposed to conservative and aggressive investors on the extreme low and high ends respectively. The value obtained from the Investment Risk Tolerance Score is reflected by the form of investment of the inherited lump sum. In this investment, the total funds have been subdivided and spread across low-risk, medium-risk, and high-risk ventures. The highest amount of money has been allocated to low-risk investment, particularly the treasury bonds.

References

Bradley, M., & Roberts, M. R. (2015). The structure and pricing of corporate debt covenants. The Quarterly Journal of Finance, 5(02), 1550001.

Grable, J., & Lytton, R. H. (1999). Financial risk tolerance revisited: the development of a risk assessment instrument☆. Financial services review, 8(3), 163-181.