What is risk tolerance and why do we measure it?

Risk tolerance is how emotionally comfortable a person is with taking the 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.

By knowing how comfortable you are with investment ups and downs, you can make sure that you don’t panic, or worse, blame someone else when a risk is realised.