Risk Tolerance
An investor's combined willingness and ability to bear investment risk — a core input to the investment policy statement.
The classic item gives you a vignette where willingness and ability point in opposite directions — a wealthy retiree who calls herself “conservative,” or a young investor with a long horizon who panics in drawdowns — and asks for the overall risk tolerance. The tell is that conflict; the answer almost always hinges on planning to the lower of willingness and ability and explaining the gap to the client. A common variant tests which factor you can address: ability is objective and the binding cap, whereas willingness is subjective and, when it stems from misperception, can sometimes be tempered through education (the curriculum warns you should not try to override a genuine preference). Never advise taking more risk than ability permits just because the client is eager.
Don’t confuse risk tolerance with what it feeds. Tolerance is an IPS input; the strategic asset allocation is the output — the long-run policy (target) asset-class weights it justifies. On the exam, low ability caps the plan regardless of high willingness.
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