In finance world, willingness and ability to take risk belong to 2 different concepts. Willingness to take risk refers to one’s character, education, investment experience, culture and even religion.
For instance, many colleagues around me are high income earners. However, they only invest in time deposits as they are either conservative, have poor experience in investment or simply cannot invest due to religious constrains. They are unwilling to take risk for mainly emotional reasons.
On the other hand, ability to take risk refers to quantifiable criteria like level of wealth, investment horizon, liquidity preferences and investment objectives. A investor with $5M in his account will most likely not hesitate to invest $250k into a high yield bond. His ability to take risk comes from his ability to lose (more) compared to the investor with a much lower level of wealth.
Similarly with a lower liquidity preference and longer time horizon; investors are recognised as …
Advertisements