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

In risk profiling of an investor, which of the following best describes 'risk capacity'?

Risk capacity is the investor's financial ability to absorb losses without endangering goals. It depends on objective factors such as income, assets, liabilities and time horizon, unlike risk tolerance, which reflects emotional comfort with fluctuations in portfolio value.

  1. AThe investor's emotional comfort with portfolio fluctuations
  2. BThe investor's financial ability to absorb losses without jeopardising goalsCorrect
  3. CThe return the investor expects to earn each year
  4. DThe number of products the investor has previously purchased

Explanation

Risk capacity is an objective measure of how much loss a client can bear financially, based on income, assets, liabilities, time horizon and goals. Emotional comfort with volatility is risk tolerance or willingness. Expected return and past product count do not define capacity.

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