The Importance Of Risk Golerance

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What does risk and return mean to the average investor? In order to answer this question, investors must first look to themselves to determine the correct steps to take. One cannot call him or herself an investor without first measuring their risk tolerance as well as risk capacity. Risk tolerance represents how much a client is willing to withstand swings in the value of held assets as well as changes in general market conditions. One of the most common ways of measuring one’s risk tolerance is by taking reliable questionnaires and reviewing historical returns in order to better understand what kind of downturns one is able to stomach for different asset classes. Risk capacity is the investor’s ability to take on risk and what he or she must …show more content…
At first glance, the T. Rowe Price Long-Term Treasury Index (PRULX) produced betas around 1. This means that the amount of risk of the asset was around the same as the amount of risk of the market. Risk for treasuries is static and contain little to no volatility. Using this as the basis, we can see how the betas of the other funds vary in either direction. For example, the AB Core Opportunities Fund Class A (ADGAX) produced very high betas during the dotcom bubble and invested highly in the technology sector. At the time, many investors were willing to overlook traditional statistics and instead base decisions on confidence in advancements in technology. Generally, technology stocks tend to have beta values that are greater than 1 due to the uncertainty that comes along with it. High beta assets are usually riskier, but there is a potential for greater returns. On the other hand, the rest of the data we uncovered mainly produced betas of less than 1, meaning that they were less risky relative to the greater market. Finally, it is important to note that at the end of the dotcom bubble around 1999 and beyond, beta values return to more stable values. The lesson learned here is that although the market fluctuates, what goes up must come

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