How can an investor determine their risk tolerance?

• A. By considering time horizon and financial goals only.
• B. By calculating the potential gains in high-risk assets.
• C. By considering time horizon, financial goals, comfort with losses, and capacity to endure short-term volatility.
• D. By maximizing diversification across sectors without evaluating risk.

Answer: (C)

Determining risk tolerance involves assessing four key factors: the time you have before needing the money, the financial goals you’re aiming for, how comfortable you are with losses, and your ability to endure short-term market volatility. The best answer includes all four because time horizon affects how much risk you can take—longer horizons let you absorb downturns since there’s time to recover. Financial goals help set the required level of risk and return. Comfort with losses captures the emotional side of investing—whether you’d stay the course during a drop. Capacity to endure volatility reflects the financial cushion you have to weather fluctuations without abandoning your plan. Put together, these aspects ensure your investment strategy matches both your finances and your comfort with risk. Other options miss elements: one only mentions time horizon and goals, ignoring emotional and capacity factors; another focuses on potential gains in high-risk assets rather than whether you can tolerate that risk; and another suggests maximizing diversification without evaluating your actual risk tolerance.