A financial planner is conducting a risk assessment for a new client, David. David states he can tolerate a 10% portfolio decline before he starts to feel uncomfortable, but a 20% decline would cause him significant distress and likely lead him to sell his investments. He also expresses a strong desire for capital preservation over maximizing returns. This information primarily addresses which component of risk profiling?

Question: A financial planner is conducting a risk assessment for a new client, David. David states he can tolerate a 10% portfolio decline before he starts to feel uncomfortable, but a 20% decline would cause him significant distress and likely lead him to sell his investments. He also expresses a strong desire for capital preservation over maximizing returns. This information primarily addresses which component of risk profiling?

Answer options:

• Risk capacity, as it relates to David's ability to take on financial risk. ✅ Risk tolerance, as it describes David's psychological comfort with risk.
• Risk need, relating to the level of risk required to meet his financial goals.
• Risk perception, reflecting his understanding of market fluctuations.

Correct answer: Risk tolerance, as it describes David's psychological comfort with risk.

Explanation: Risk tolerance refers to an investor's psychological willingness to take on risk and their emotional comfort level with price fluctuations and potential losses. David's statements directly reflect his emotional threshold for market declines.