Question 2: What is risk tolerance?
Risk tolerance is ability to absorb risk. Risk tolerance is the ability to face/ bear/ absorb the negative side of uncertainty on goals.
Investopedia defines Risk tolerance as “The degree of uncertainty that an investor can handle on a negative change in the value of his or her portfolio”
ISO 31000 defines risk appetite amount and type of risk that an organization is prepared to pursue, keep or take but does not define Risk tolerance.
Questions: is risk appetite and risk tolerance is same?
If Risk appetite can be defined as willingness to take risk then Risk tolerance can be defined as ability/ willingness to bear risk. There may not be one to one relationship between Risk appetite and Risk tolerance. You may have risk tolerance limit which is lower than risk appetite and vice versa.
Risk appetite is pro-active and risk tolerance is re-active.
