Risk profile using PCM and RSM

In this paper we describe the investors’ risk profile in order to meet the minimal requirements that Italian financial institutions must satisfy by law. The risk profile focus on three latent traits of the investor: 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 knowledge of financial instruments 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.