What is Risk Tolerance?
Risk tolerance refers to an individual’s or firm’s willingness to accept uncertainty while pursuing objectives. On an individual level, it gauges an investor’s comfort with potential losses in their portfolio, reflecting their ability to withstand market volatility. From an organizational perspective, risk tolerance involves evaluating how much risk an entity can bear in achieving its goals. It differs from risk appetite, which concerns the amount of risk pursued. Crucially, risk tolerance focuses on accepting risky outcomes and having controls in place. Understanding one’s risk tolerance is vital in financial planning, aiding informed decisions on asset allocation and investments. Various tools, like risk tolerance quizzes, help assess an individual’s comfort with financial risks, guiding prudent investment choices.
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