Define: Risk Tolerance

UK Accounting Glossary

Definition: Risk Tolerance



Advertisement



Full Definition of Risk Tolerance


In investing, risk tolerance is the willingness of an investor to tolerate risk in making investments. A high-risk tolerance indicates a willingness to invest in more risky investments, and vice versa. In modern portfolio theory, higher returns are assumed to be rewarded by higher potential returns, so individual risk tolerance may limit the kind of return an investor can reasonably expect. Individual risk tolerance is based on psychological factors, such as comfort level, and other personal circumstances, such as years left until retirement (if any) and level of financial security. Financial advisors typically try to estimate their client’s risk tolerance before making an asset allocation strategy. The traditional approach is to increase the allocation to stocks as risk tolerance diminishes. In practice, risk tolerance is very difficult to quantify.


Advertisement




Cite Term


To help you cite our definitions in your bibliography, here is the proper citation layout for the three major formatting styles, with all of the relevant information filled in.

Page URL
https://payrollheaven.com/define/risk-tolerance/
Modern Language Association (MLA):
Risk Tolerance. PayrollHeaven.com. Payroll & Accounting Heaven Ltd. April 03, 2020 https://payrollheaven.com/define/risk-tolerance/.
Chicago Manual of Style (CMS):
Risk Tolerance. PayrollHeaven.com. Payroll & Accounting Heaven Ltd. https://payrollheaven.com/define/risk-tolerance/ (accessed: April 03, 2020).
American Psychological Association (APA):
Risk Tolerance. PayrollHeaven.com. Retrieved April 03, 2020, from PayrollHeaven.com website: https://payrollheaven.com/define/risk-tolerance/

Definition Sources


Definitions for Risk Tolerance are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 6th February 2020.