Risk Tolerance
Definition
An investor's ability and willingness to endure losses in their investment portfolio. Risk tolerance depends on age, income, time horizon, financial goals, and emotional comfort with volatility. Higher risk tolerance = more stocks, lower = more bonds.
Related Terms
Asset Allocation
The strategy of dividing investments among different asset categories like stocks, bonds, cash, and real estate. Proper asset allocation is the primary driver of portfolio returns and risk management.
Portfolio
The collection of all investments held by an individual or institution. A well-constructed portfolio is diversified across asset classes, sectors, and geographies to balance risk and return.
Volatility
A statistical measure of the dispersion of returns for a given security or market index. High volatility means large price swings; low volatility means stable prices. The VIX index measures expected volatility of the S&P 500.
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