Groundlearn / Glossary / Risk tolerance
Risk tolerance
A CFA term, defined in plain English with the distinction examiners test.
What it means
How much risk an investor is both able and willing to take. Ability comes from the balance sheet and horizon; willingness comes from temperament.
The exam angle
Where the two conflict, the prudent course is the lower of them, plus client education. That is an examinable judgement.
Where it appears in the syllabus
- Portfolio ConstructionCFA Level III · exam weight 15–20% · Equity and fixed-income portfolios, alternatives, institutions, trading costs.
- Portfolio ConstructionCFA Level I · exam weight 8–12% · Risk and return, the CAPM, IPS construction, behavioural biases.
Related terms
- Behavioural biasA systematic departure from rational decision-making, either cognitive — an error of reasoning that education can…
- Investment policy statementThe written agreement setting out an investor’s objectives, constraints and the rules the portfolio will be run by.
- Goals-based investingStructuring wealth into separate portfolios for separate objectives, each with its own horizon and risk tolerance,…
- Human capitalThe present value of an individual’s expected future earnings, treated as an asset alongside their financial wealth.
- Liability-driven investingManaging a portfolio against the liabilities it must fund rather than against a market index.
- SuitabilityThe requirement to judge an investment against the client’s objectives, constraints and circumstances before…
Educational content only. This is not financial, investment, legal or regulatory advice. Check the official curriculum for your own exam before relying on any definition here.
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