Risk Tolerance Definition
What is risk tolerance?
Risk tolerance is the degree of variability in investment returns that an individual investor is willing to experience. Different investors have different risk tolerances. Some are willing to take on more risk in order to potentially earn higher returns, while others prefer to avoid risk and are satisfied with lower potential returns.
How is risk tolerance measured?
There are a number of ways to measure an individual’s risk tolerance. One common method is to ask investors how they would feel if their investments lost money in the short term. Another way to measure risk tolerance is to ask investors how much they would be willing to lose if their investments experienced a major downturn.
What factors influence an individual’s risk tolerance?
There are a number of factors that can influence an individual’s risk tolerance, including age, investment goals, and personal circumstances. For example, younger investors may be more willing to take on risks than older investors because they have more time to recover from any losses. Investors with longer-term goals may also be more willing to take on risks than those with shorter-term goals. And finally, investors with fewer financial obligations may be more willing tolerate higher levels of risk than those with more obligations.
