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What is financial risk tolerance?

The extent to wish an investor is willing to accept more risk in exchange for the possibility of a higher return (Website, Financialdictionary.com). Although the importance of financial risk tolerance is well documented, in practice the assessment process tends to be very difficult due to the subjective nature of risk taking [Thoresen, C. E. & Low, K. G.].

Financial risk tolerance in general looks at investment strategies in terms of financial risks. It looks at how much money a person has, and how much money a person can afford to lose. If a person is identified to lose more money, take bigger risks, funds, and aggressive stocks in the currency market, then his risk tolerance level is considered to be high. But, if a person cannot afford to lose the money, does not invest much of it, and sticks to more conservative stocks and funds, his risk tolerance level is relatively low [Bakshi, G. S., & Chen, Z., (1974)3].

Financial risk tolerance has been a key focus of study mainly by Roszkowski and Snelbecker in 1990’; Grable and Joo 1999 and by Riley and Chow in 1992; Quattlebaum in 1988. According to Grable and Joo (2000), as different principles are used for different purposes, the study of financial risk tolerance has become more fragmented [Elander, J., (1993)43].

Reference

  • Thoresen, C. E., & Low, K. G. Journal of Social Behavior and Personality, 1990.
  • Bakshi, G. S., & Chen, Z. Journal of Business, 1974
  • Snelbecker, G. E., Roszkowski, M. J., & Cutler, N. E. The Journal of Behavioral Economics, 1990
  • Grable, J. E., & Joo, S. H. Family Economics and Resource Management Biennial, 1997.

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