Investment Risk Tolerance Quiz (2024)

One of the foundational principles of finance is that risk and return are directly proportional. If your investment objective is focused on higher returns, you’ll need to assume more risk to achieve those returns.

Risk tolerance describes the amount of risk an individual is willing to take on to achieve a particular level of return. Your own personal risk tolerance is one of the most important factors to consider when it comes to establishing your investment objectives and making investment decisions.

Before you begin investing, you can better understand your own appetite for risk by completing a risk tolerance assessment.

Assessing Your Risk Tolerance

Answer the following questions to gain a better understanding of where you fall on the risk tolerance spectrum.

Score your response to each question on a scale of 1 to 5, where 1 indicates you strongly disagree with the statement, while 5 indicates you strongly agree.

1. I am willing to accept above average risk to achieve above average investment returns.

2. I am willing to hold an investment rather than sell it if I expect it to rebound within 12 months, even though it has lost value over the past year.

3. I am comfortable investing in the stock market.

4. I am well informed about investing and personal finance.

5. I would consider investing in commodities and alternative investments.

For the following questions, please choose the answer that best describes you:

6. If I had $50,000 to invest, I would find which of the following allocations most appealing:

A. 100% in United States Treasury securities.

B. 50% in U.S. Treasuries and 50% in an fund.

C. 40% in a variety of fixed income instruments and 60% in an .

D. 20% in bonds, 40% in an S&P 500 Index fund, and 40% in high growth stocks or funds.

E. 20% in high growth stocks or funds and 80% in alternative investments like hedge funds.

7. Investment analysts are predicting an extended bull market. Fixed income investments are predicted to decline slightly in price. Suppose your existing assets are allocated to government bonds, which are broadly considered to be safe investments. Which course of action would you consider?

A. Maintain your holdings as they are.

B. Sell 50% of the bonds, and put the proceeds into a money market account.

C. Sell 80% of the bonds, allocate 30% of proceeds to a money market account and 70% to an S&P 500 Index fund.

D. Sell 100% of the bonds, invest 50% of the proceeds in an S&P 500 Index fund and 50% in a growth stock fund.

E. Sell 100% of the bond, invest 20% in an S&P 500 Index fund and 80% in a growth stock fund.

8. How would your closest friends describe your attitude to risk?

A. Acutely fearful of risk.

B. Disinclined to take risk, but may consider it under the right conditions.

C. Will take moderate risk based on careful research.

D. Will take significant risk based on careful research.

E. Always ready to bet the farm for the prospect of a big payout.

9. Your rich uncle left you $500,000 on the condition that you invest in one asset class. You would choose:

A. A money market fund.

B. U.S. Treasury Bonds.

C. An S&P 500 Index fund.

D. A growth-oriented mutual fund.

E. Alternative assets such as hedge funds.

10. You are a contestant on a TV game show. Which of the following would you choose?

A. $1,000 in cash.

B. A 50% chance of winning $5,000.

C. A 25% chance of winning $10,000.

D. A 15% chance of winning $100,000.

E. A 5% chance of winning $1 million.

Assessing Your Results

For questions 1-5, give yourself 1-5 points consistent with your numerical answer. For questions 6-10, A = 1 point, B = 2, C = 3, D = 4, and E = 5. Total the points from all questions to calculate your score.

Conservative—Low Risk Tolerance (10-20 points)

If you’re a conservative investor with a low tolerance for risk, capital preservation will be your principal concern. If your risk tolerance is low, you’re unlikely to be comfortable suffering any losses in investment value. Bear in mind, though, that your investments need to earn a return equal to the inflation rate just to maintain their current value.

Moderately Conservative—Below Average Risk Tolerance (21-28 points)

If you fall into this range, you’re still likely to be uncomfortable with the idea of losing any value. Protecting principal will still be uppermost in your mind. However, you will likely be willing to consider investments bearing a small degree of risk to pursue gains.

Moderately Aggressive—Average Risk Tolerance (29-35 points)

If you have an average tolerance for risk, you will seek to reduce risk while pursuing returns. You are likely to want to generate returns that outpace inflation and offer the potential for appreciation, but you will be mindful of reducing risk.

Very Aggressive—Above Average Risk Tolerance (36-44 points)

If you have an above average tolerance for risk, you will emphasize maximizing investment returns. You will be willing to accept considerable risk to achieve your objectives. You will likely consider assets beyond stocks and bonds.

Extremely Aggressive—High Risk Tolerance (45-50 points)

If you fall into this category, your primary goal will be maximizing investment returns. You will tolerate high volatility and significant losses in pursuit of your objectives and are likely to emphasize investing in alternative assets and more speculative ventures.

What Is Risk Tolerance?

Risk tolerance is a measure of your comfort with taking on risk. The more comfortable you are with risk and uncertainty, the less likely you are to be risk averse in investment decision making. A lower level of risk tolerance may lead to conservative decision making and a willingness to accept lower levels of return.

Temperament plays a strong role in the ability to tolerate risk. More conservative, risk averse people are likely to avoid risk in all areas of life. Others thrive on it, taking up hobbies like skydiving or polo. But willingness to assume risk in one area doesn’t always translate into a willingness to take on financial risk, although it does make it more likely.

What is a good forecaster of risk appetite in finance is risk tolerance in a related money realm, says Nicki Potts, director of financial profiling & planning for research giant Morningstar. A risk taker in gambling or borrowing, for instance, is likely to be a risk taker in investing. But someone who relishes, say, hang gliding would not necessarily be a risk taker with their investments.

The source of a person’s assets also plays a role in risk tolerance. Those who have inherited wealth might be risk averse if they fear they could not earn back lost money, especially large amounts. Someone who has built their wealth from the ground up, an entrepreneur for example, is likely to be more comfortable with assuming financial risk.

Why It’s Important To Understand Your Risk Tolerance

You must understand your risk tolerance to set realistic financial goals. If you’re extremely risk averse but want to earn 10% a year, your objective is unfeasible. However, if that is a financial necessity, you may need to become more comfortable with risk.

In creating any type of financial plan, you need to take risk tolerance into account. Many factors can influence risk tolerance, including temperament and personality, age, income, occupation and family status.

Choosing Assets According to Your Risk Profile

To maximize returns while assuming a level of risk you’re comfortable with, you must develop a set of financial objectives that will help you achieve short-term goals while contributing to long-term financial stability. If you have an accurate understanding of your attitude toward risk, you can create a portfolio that offers adequate protection against losses while seeking returns.

Very conservative investors who emphasize capital preservation should consider certificates of deposit, money market funds and fixed income investments, particularly government bonds. However, none of these investments will contribute to capital appreciation, and it will require careful attention to ensure that your portfolio is not eroded by inflation.

In any investment portfolio, an allocation to bonds contributes to diversification. For less risk averse investors, there are corporate bonds and high yield bonds that offer greater returns as the investor moves along the risk spectrum.

As investors move along the risk spectrum, they will also be increasingly focused on generating investment returns and will allocate more assets to equities as risk tolerance increases.

At the more conservative end, investors might choose broad market index funds, while at the more aggressive end of the equity spectrum, investors may focus on growth stocks, small cap stocks and other riskier investments.

The most aggressive investors may enjoy day trading, or consider commodities, derivatives, hedge funds and private investments as well. However, alternatives often require investors to be accredited, meaning they must meet specific requirements in terms of income and expertise

Working with a financial advisor to create a disciplined and long-term investment strategy is a good way to build a diversified portfolio that reflects your risk/return profile.