Risk Tolerance
The degree of investment risk an investor is willing and able to accept.
What is Risk Tolerance?
Risk tolerance is the degree of variability in investment returns that an investor is willing to withstand. It encompasses both the financial ability to absorb losses (risk capacity) and the psychological willingness to stay invested during downturns (risk appetite). Risk tolerance is shaped by factors including age, income stability, investment time horizon, financial goals, and personal temperament. It is a core input into asset allocation — higher risk tolerance supports more equity exposure, lower tolerance favors bonds and cash.
Example
An investor with high risk tolerance who experienced the 2008–09 financial crisis (S&P 500 −57%) without selling has demonstrated the ability to endure significant drawdowns.
Source: CFA Institute — Risk Analysis