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Forum | Papers » Investors’ risk tolerance and the Covid-19 crisis: introducing a Suitability Ratio

Investors’ risk tolerance and the Covid-19 crisis: introducing a Suitability Ratio

Paolo Antonio Cucurachi, Ugo Pomante
October 2020 - n. 10
Keywords: Tolleranza al rischio, Suitability Ratio, Covid-19
Jel codes: G21, G28, I10

The market crisis caused by the pandemic has forced the banks’ suitability systems to a stress test which has led to a massive problem of unsuitability. In this work we propose a model based on a new approach, called «Suitability Ratio», which has the advantage of structurally solving the problem (and its negative consequences) deriving from the high sensitivity of the widely used risk metrics, and enhancing the strategic asset allocation. In terms of policy, the Suitability Ratio is compatible with each risk parameter and attributes a decisive role to the construction of model portfolios. However, this revolution in the suitability process requires the approval of the Supervisory Authorities, which without underestimating the relevance of the risk, should give similar emphasis to the performance of the portfolio. Our hope is that this work will contribute to a rethinking of the suitability methods, abandoning the unjustified use of the intraday trader’s models, which are not consistent with the needs of the long term investor.

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