Risk tolerance is defined as what?

• A. It guides market timing to maximize gains.
• B. It measures only an investor's current income.
• C. It is an investor's ability and willingness to endure losses.
• D. It determines the frequency of trading.

Answer: (C)

Risk tolerance is about how much risk an investor is willing and able to take on in pursuit of their goals. It combines two elements: ability to endure losses (financial capacity, time horizon, other assets) and willingness to withstand market volatility. This concept guides asset allocation: a higher tolerance leads to a larger allocation to growth assets like stocks, while a lower tolerance favors more conservative choices such as bonds and cash to protect capital. It isn’t about timing the market, measuring current income, or how often you trade.