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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Introduction to Personal Financial Planning

An adviser is preparing a plan for Mr. Arvind Nair. Which factor would be treated as part of his risk capacity rather than only his risk tolerance (willingness)?

Stable income, no dependants and a long time to retirement describe risk capacity, which is the objective financial ability to absorb losses. Discomfort with falling values, panic selling history and attitude to uncertainty reflect risk tolerance or willingness, which is psychological rather than financial.

  1. AHis discomfort on seeing portfolio values fall
  2. BHis past experience of panic selling during a market crash
  3. CHis stable income, absence of dependants and long time to retirementCorrect
  4. DHis general attitude toward uncertain outcomes

Explanation

Risk capacity is the ability to bear loss, determined by objective factors such as income stability, liabilities, dependants, net worth and time horizon. Discomfort, past panic behaviour and attitude relate to willingness or psychological tolerance, not ability.

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