Today we are proud to unveil our latest whitepaper; Application of Preference Measurement: The Case of Nitrogen. Deep and rigorous in its review, the whitepaper independently reviews, via a team of PhDs, Nitrogen’s approach to measuring an investor’s risk tolerance and how it is applied to an investor’s portfolio. The whitepaper reviews the challenges inherent in accurately assessing risk preferences, as well as how to practically apply them, and affirms the need for a quantitative approach to risk assessment in order for its outcome to be applicable to a portfolio.
You can download the white paper here and read the full announcement below.
July 8th, 2015 (SACRAMENTO, CA) – Riskalyze, the company that invented the Risk Number™ for financial advisors and their clients to use to align risk preference with portfolio risk, released its latest whitepaper today, titled Application of Preference Measurement: The Case of Nitrogen. The whitepaper independently reviews the company’s risk tolerance methodology and examines the company’s overall technical approach. Commissioned by the firm, Nitrogen was contractually prevented from influencing the opinions of the authoring academics.
There are two key reasons why risk preferences must be the starting point for a discussion between advisor and client. The first way an advisor adds value is to act as the caretaker for the investor’s portfolio and the second is to improve on the investor’s decisions. In both instances, it is necessary that the starting point is an accurate, actionable understanding of the client’s risk preferences.
“Nitrogen’s approach is extremely simple, and extremely specific. It offers choices that are binary, using numbers that are familiar to investors. This allows precise estimation and minimizes the risk that an investor will make mistakes while taking the questionnaire,” said Dr. Noah Smith, PhD, Assistant Professor at Stonybrook University. “In addition, the questions are highly relevant to the investor, an improvement on questionnaires in which choices are only percentage-based or completely inconsequential to the survey taker.”
To measure investor risk preferences, advisors can provide their clients with a questionnaire. The Nitrogen questionnaire offers them a series of 50-50 gambles representing portfolio choices. The numbers used in the questionnaire are based on a range defined by three values: 1) the investor’s current assets in the portfolio in question, 2) a lower bound specified by the investor as a “disastrous” loss, and 3) an upper bound specified by the investor as an amount he would be “content” with.
The Nitrogen methodology also allows the advisor to quantitatively and precisely measure the risk in an investor’s portfolio. In using the Nitrogen metric to assess both risk tolerance and portfolio risk, the comparison between the two becomes far more meaningful to an investor. This frees the advisor to focus on creating value for investors by helping them to make better decisions, because the investor’s preferences are instantly clear.
“We are grateful to this incredible team of respected academics for diving deep into our methodology and validating that the quantitative approach embodied in the Risk Number is vastly superior to the old-school stereotypical approach to risk tolerance,” said Aaron Klein, CEO at Nitrogen. “We’re pleased that advisors, investors and back office staff will be able to utilize this whitepaper in vetting our technology. We know that what we do has a dramatic affect on the ultimate success of many investors, and we take that responsibility very seriously.”
For the full copy of the new Nitrogen whitepaper, Application of Preference Measurement: The Case of Nitrogen, click here to download.
For all media inquiries regarding the whitepaper and Nitrogen’s findings, or to arrange an interview with CEO Aaron Klein, please contact: [email protected]
Nitrogen invented the Risk Number™ and was named as one of the world’s 10 most innovative companies in finance by Fast Company Magazine. Nitrogen works with advisors, RIAs, independent broker-dealers, custodians, clearing firms and asset managers to align the world’s investments with each investor’s Risk Number™. Learn more at riskalyze.com or follow @Nitrogen on Twitter.