Risk Capacity
How much loss an investor can absorb financially without their plans failing.
Formula
Test: the loss that could be sustained while still meeting known obligations from other resources and income
Unit
%
In depth
Capacity is an objective constraint determined by income stability, existing obligations, emergency reserves and horizon — it exists whether or not the investor feels comfortable. Someone with a secure income, no debt and a twenty-year horizon has high capacity even if their tolerance is low; a retiree drawing on the portfolio has low capacity even if their tolerance is high. The correct allocation is bounded by the lower of the two, since exceeding capacity risks actual failure and exceeding tolerance risks abandonment. It changes with circumstances, which is why it deserves periodic review rather than a one-time assessment.
Worked example
An investor with six months of expenses in reserve and a job in a cyclical industry has low capacity regardless of appetite, because a market fall and a job loss are correlated and would arrive together.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Risk Capacity” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.