Conventional wisdom says that risk tolerance soars in good times and collapses in bad times and that this drives behavioural change. However it is argued that the changed behaviour is not due to changed risk tolerance but might well be due to changes in perceived risk and, perhaps, risk capacity. As a result, reliance on traditional risk questionnaire profilers is dangerous and provides a poor understanding of a client’s risk tolerance. Furthermore, they fail to encourage clients’ ownership of one of the most critical parts of their financial plan - the level of financial risk they take on in their investments. The evidence for the enduring nature of an individual’s financial risk tolerance is reviewed. Four key aspects of risk tolerance that should be taken into account in the provision of investment advice are defined and  the risk trade-off decisions that an individual needs to make are illustrated.

Not every investor looks at or defines risk in the same way and definitions of risk vary. The author argues that beta is only a moderately relevant measure of price volatility and that volatility is not necessarily risk. In fact, at the right valuation, high beta could be more of an indicator of extraordinary opportunity than high risk. At extremely high valuations, a high beta might imply significant risk. However, high valuation represents high risk, even on a low beta stock.The author suggests that for value investors, beta is no substitute for comprehensive research based on fundamentals.

This study was undertaken to test the persistence of financial risk tolerance over time as a way to determine how mutable risk attitudes are in practice.

Using a unique international panel dataset, this module documents the persistence of risk tolerance test scores over time. Initial risk tolerance test scores, explained more than 60 percent of retest scores. Other significant variables associated with retest risk tolerance scores were gender, age, and year of retest. Specifically, women’s scores were found to be lower at the retest. Older respondents exhibited lower risk tolerance scores at the retest, and compared to those who retested in 2014–2015, scores were lower when retested in 2011, 2012, and 2013. Essentially, initial test scores explained nearly all of the variance in retest scores.

A review of measurement issues is provided, along with a description of the methodology used to test the persistence of risk tolerance, a presentation of results, and a brief discussion of findings.