Moondog
Term

Risk capacity

How much risk a family can afford to take, given its goals, liabilities and time horizon.

Risk capacity is the objective ability to absorb losses without endangering essential goals. A family may have a high tolerance for risk yet a low capacity, or the reverse, and the investment policy must respect the lower of the two.

The danger is a family comfortable taking risk but unable to absorb the loss without endangering an essential goal. A sound policy respects the lower of capacity and tolerance, which sometimes means taking less risk than the family would happily accept.

Related terms

Alpha Return earned above what the market or a benchmark would explain. Alternative investments Assets beyond listed equities and bonds, such as private markets, real assets and hedge funds. Asset allocation How a portfolio is divided among asset classes such as equities, bonds and alternatives. Benchmark A reference index used to judge a portfolio's performance and risk. Beta A measure of how much an asset moves with the broader market. Capital market assumptions Forward-looking estimates of return, risk and correlation for each asset class.

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