Risk Tolerance is an investor’s long-term psychological willingness to trade-off risk and return.
It establishes the investor’s baseline Suitable Risk Level for their total net worth (before any adjustments for Risk Capacity, low Knowledge and Experience, or low Composure).
It is measured using a psychometric questionnaire, which comprises several statements selected from over 500 items using psychometric and statistical analyses of responses from a broad baseline population.
Responses are used to determine the overall Risk Tolerance score, where higher scores represent a greater willingness to trade off the chance of poor outcomes in the hope of better outcomes.
The scores are aggregated and mapped to five (or in some cases seven) categories:
|
Five Risk Tolerance Categories |
Seven Risk Tolerance Categories |
| Low | Very Low |
| Medium - Low | Low |
| Medium | Medium - Low |
| Medium - High | Medium |
| High | Medium - High |
| High | |
| Very - High |
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