Risk profile using PCM and RSM


In this paper we analyze the investors’ risk profile in order to meet the minimal requirements that Italian financial institutions must satisfy by law. We focus particularly on three latent traits of the investor’s risk profile: knowledge of financial instruments, the investor’s personal predisposition to risk/earn, and the investor’s temporal horizon. We specifically identify a questionnaire whose items describe different characteristics of these three latent variables. In order to take into account the investor’s preferences and his/her psychological attitude we propose analyzing the risk profile questionnaire with two different sub-models of the polytomous Rasch model: the Partial Credit Model (PCM) and the Rating Scale Model (RSM). Finally, we discuss the possible uses of the proposed analysis in a financial context.

DOI Code: 10.1285/i20705948v5n3p327

Keywords: MiFID, risk profile, predisposition to risk/earn, partial credit model, rating scale model

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