Risk Capacity

Risk capacity is a quantitative measure of how much financial risk an individual, household, or organization can responsibly take without jeopardizing their long-term objectives, financial stability, or essential obligations. It depends on objective factors such as income, net worth, assets, liabilities, time horizon, and anticipated cash flows, rather than emotional comfort with risk. High risk capacity means a person or entity can absorb losses and continue meeting key goals or obligations, while low risk capacity means even moderate losses could seriously disrupt plans or financial health. Risk capacity is distinct from risk tolerance—which reflects psychological willingness to take risk—and should guide the maximum level of risk taken in an investment strategy or financial plan.