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CLIENT FINANCIAL RISK TOLERANCE MODELFinancial service institutions face a difficult task in evaluating clients risk tolerance. It is a major component for the design of an investment policy and understanding the implication of possible investment options in terms of safety and suitability.
Here we present a simple model of client's risk tolerance ability which depends on his/her annual income (AI) and total net-worth (TNW).
1.1 Modeling the Control Variables
The control objective of the client financial risk tolerance policy model is for any given pair of input variables (annual income, total net-worth) to find a corresponding output, a risk tolerance (RT) level.
Suppose the financial experts agree to describe the input variables annual income and total net-worth and the output variable risk tolerance by the sets:
Annual income,A = fA1;A2;A3g = fL;M;Hg;
Total net-worth,B = fB1; B2; B3g = fL;M;Hg;
Risk tolerance,C = fC1; C2; C3g = fL;MO;Hg;
hence the number of terms in each term set is n = m = l = 3. The terms
have the following meaning: L= low; M= medium; H= high and MO= moderate. They are fuzzy numbers whose supporting intervals belong to the universal setsU1 = {x x 1000:0