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

In risk profiling, which of the following best describes an investor's 'risk tolerance' as distinct from 'risk capacity'?

Risk tolerance is the investor's psychological willingness to accept fluctuations and possible losses. It differs from risk capacity, which is the objective financial ability to absorb losses without jeopardising goals. Advisers assess both separately when building a risk profile.

  1. AThe financial ability of the investor to absorb losses without affecting life goals
  2. BThe psychological or emotional willingness of the investor to accept fluctuations and possible lossesCorrect
  3. CThe return required to meet the investor's stated financial goals
  4. DThe length of time available before the money is needed

Explanation

Risk tolerance is the attitudinal, emotional willingness to bear volatility and loss. Risk capacity is the objective financial ability to absorb losses, which is why the first option describes capacity, not tolerance. Required return and time horizon are separate inputs to the profile.

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