Risk Tolerance – an investor’s willingness to take risk – is just the start. To truly understand how much risk is suitable for them, we have to understand their ability to take risk.
We do this by undertaking a review of an investor’s financial circumstances beyond their investment portfolio. For example: what other assets do they hold? Do they have any liabilities? How much money do they expect to contribute or withdraw from their portfolio in future?
This information is summarised in the concept of an investor’s Risk Capacity.