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NISM Certifications · NISM-Series-X-B: Investment Adviser (Level 2) · Risk Profiling for Investors

In risk profiling of a client, which of the following best describes 'risk tolerance' as distinct from 'risk capacity'?

Risk tolerance is a client's psychological or emotional willingness to accept swings in portfolio value. It differs from risk capacity, which is the financial ability to absorb losses without derailing goals. A client may be willing to take risk yet lack the capacity, or the reverse.

  1. AThe client's psychological or emotional willingness to accept fluctuations in portfolio valueCorrect
  2. BThe client's financial ability to absorb losses without affecting life goals
  3. CThe minimum return required to meet the client's financial goals
  4. DThe time left until the client's goal needs to be funded

Explanation

Risk tolerance is the attitudinal or psychological willingness to bear volatility. Risk capacity is the financial ability to absorb losses, and required return is the return needed for goals. Option B describes capacity, not tolerance.

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