Risk tolerance comes from risk capacity and risk attitude. What are the major determinants of risk...

Risk tolerance comes from risk capacity and risk attitude. What are the major determinants of risk capacity and risk attitude?

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Risk capacity is the ability of the person to take risk.

The determinants of risk capacity are :

The financial health of the investor.: If the investor is in a sound financial position, he is more capable of taking risks.
The number of dependants : When the investor has fewer number of dependants , his risk taking appetite rises, in contrast to when he has a large number of dependants.
Time horizon : When an investor has a long term horizon then he has a higher appetite for taking risks. When the investor is retired or his nearing retirement, his risk taking appetite falls.
Goals of the investor: If the investor has certain goals which he needs to achive, then teh capaicty to take risks is reduced considerably.
Responsibilities and expenses: When the expenses of the investor is high and he has a lot of responsibilities then the risk taking capacity falls.
Risk attitude is a state of mind. A person can be risk loving , where he loves to takes risk and risk averse where he does not like taking risks. This is dependent on the investors individual attitude.

Rahul Sunny answered 7 months ago

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