Risk tolerance is how emotionally comfortable a person is with taking financial risk. For example, how much a person is willing for their portfolio to diminish for a chance to make bigger returns. It is psychological and is best measured with a psychometric tool.

1. Risk Required (or Portfolio Risk)- Risk Required is the risk associated with the respective portfolio in order for the client to remain comfortable holding it for a longer period of time.

2. Risk Capacity- The level of Risk the client can afford to take.

3. Risk Tolerance– The level of Risk the client is “emotionally” comfortable with.

1. diversified across various industries and stocks (at least 14 stocks in each portfolio) making sure allocation to any individual stock is always less than 18%.

2. The same allows us to diversify unsystematic risk.

3. Regular rebalancing and churning ensures regular weeding out of under performers.

Implying, If an extremely conservative risk averse investor with a low risk tolerance and low risk taking capacity was to invest 5% of his total wealth in our riskiest and most aggressive portfolio. Assuming the portfolio has heaviest weights of 18% in an individual stock which goes bust, the respective client would only lose 0.9% of his total wealth, in fact even if every stock in the portfolio was to go bust- the client would still lose only 5% of his total wealth.

1. Age – Subdivided into three parts + Retirement, in the order of risk taking capacity being highest to lowest :

   1. Acquiring Wealth– Recently employed; age range 20 to 36.

   2. Saving Wealth – Stable Cash flow with additional responsibilities of a family; age range 36 to 54.

   3. Distribution of Wealth- Stable cash flows with probable retirement insight with highly probable contingent cash expenses with additional responsibilities; age range 54 to retirement.

   4. Retirement– Calculated cash outflows with highly probable contingent cash expense.

2. Percentage of total wealth invested and plan to invest– Lower the %age, higher the risk taking capacity.

3. Current Investments; Higher the diversification in current other investments, higher would be the risk taking capacity.

4. Percentage of Income, that goes into repayment of existing liabilities- Lower the percentage, higher the capacity.

Putting everything above together. While for most people our portfolios are suitable the proportion of optimal exposure they should maintain to respective portfolios depends from person to person given all factors explained above.