1. Risk appetite is your comfort with uncertainty
Some investors enjoy market volatility; others lose sleep over small losses. This is behavioural willingness.
Tip: Risk appetite is psychological.
2. Risk capacity is your financial ability to absorb loss
A stable income, long horizon and large emergency fund can increase capacity. A near-term goal, large EMIs or unstable income can reduce it.
Tip: Risk capacity is financial.
3. Capacity should usually set the ceiling
A 25-year-old may love risk but still have low capacity if all savings are needed for a house next year.
Note: Excitement should not override financial constraints.
4. Reassess after major life changes
Marriage, children, job loss, home purchase, retirement or large debt can change capacity even if personality stays the same.
Tip: Risk profile is dynamic, not a permanent quiz result.
5. Quick check
You enjoy stock volatility but need all savings for college fees in six months. Which should dominate?
Answer: B - The short time horizon leaves little capacity for market loss.