Understanding Risk , Risk Tolerance

Understanding Risk

Section: 5 Risk Tolerance

Everyone handles risk uniquely due to differing individual risk tolerances. Some people can afford to take risk, some cannot. Similarly, some investors can afford but do not want to take risk. Risk tolerance is influenced by many factors; research findings show that in addition to personality characteristics, age of the investor plays a significant role. Young people tend to take more risk than a retired person and thus the risk tolerance is negatively correlated to age.

It is vital to understand the personal risk tolerance before constructing an investment portfolio. Investments can be picked based on the risk tolerance level and income or cash flow requirements.

Capital losses of some selected companies in the Saudi Arabian Market (2003):

Company

Share price on the first trading day of the year

Share price on the last trading day of the year

Capital gain/loss%

Saudi Chemical Co.

179.75

147.75

-17.80%

Ahmed Hasan Fitahi & Co.

140.00

127.00

-9.29%

The above table shows the possible capital losses in one year of certain selected stocks. While investing in stocks provides lucrative returns, the downside risk can be very high as shown above.

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