Question

Discuss whether financial markets may work properly if all, or at least most people, in an economy have the same risk tolerance.

Answer 1

NO , Financial market will not work properly if most people have the same risk tolerance different class of investors have different risk tolerance in the work so that market runs properly . In financial market one's loss is considered one's profit and vice - versa therefore if all people have same risk tolerance one would find it really hard to make money.

What Is Risk Tolerance?

Risk tolerance is the degree of variability in investment returns that an investor is willing to withstand in their financial planning. Risk tolerance is an important component in investing. You should have a realistic understanding of your ability and willingness to stomach large swings in the value of your investments; if you take on too much risk, you might panic and sell at the wrong time

Aggressive Risk Tolerance

Aggressive investors tend to be market-savvy. A deep understanding of securities and their propensities allows such individuals and institutional investors to purchase highly volatile instruments, such as small-company stocks that can plummet to zero or options contracts that can expire worthlessly. While maintaining a base of riskless securities, aggressive investors reach for maximum returns with maximum risk.

Moderate Risk Tolerance

Moderate investors accept some risk to the principal but adopt a balanced approach with intermediate-term time horizons of five to 10 years. Combining large-company mutual funds with less volatile bonds and riskless securities, moderate investors often pursue a 50/50 structure. A typical strategy might involve investing half of the portfolio in a dividend-paying, growth fund.

Conservative Risk Tolerance

Conservative investors are willing to accept little to no volatility in their investment portfolios. Often, retirees who have spent decades building a nest egg are unwilling to allow any type of risk to their principal. A conservative investor targets vehicles that are guaranteed and highly liquid. Risk-averse individuals opt for bank certificates of deposit (CDs), money markets, or U.S. Treasuries for income and preservation of capital.