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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' as distinct from 'risk tolerance'?

Risk capacity is the investor's financial ability to absorb losses without derailing life goals. It depends on objective factors like income, assets, liabilities, dependants and time horizon, whereas risk tolerance is the emotional or psychological comfort with volatility in portfolio values.

  1. AThe investor's emotional comfort with seeing portfolio values fluctuate
  2. BThe investor's financial ability to absorb losses without jeopardising life goalsCorrect
  3. CThe investor's past experience of investing in equity markets
  4. DThe investor's preference for guaranteed returns over market-linked returns

Explanation

Risk capacity is an objective measure of how much loss a client can afford, driven by income, assets, liabilities, time horizon and dependants. Risk tolerance (willingness) is psychological comfort with volatility, which is why option A describes tolerance, not capacity.

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