Course 501: Building a Portfolio, Part 1
Objective 2: How Much Risk Can You Stand?
In this course
1 Introduction
2 Objective One: What Sort of Return Do You Need?
3 Objective 2: How Much Risk Can You Stand?
4 Measuring Your Risk Tolerance

Risk tolerance goes hand in hand with return objective. Even if you are new to investing, you have no doubt heard that you can lose money by investing in the financial markets. By coupling your return objective with an appropriate risk tolerance, you can establish a long-term set of guidelines for your portfolio. The amount of risk you are willing to tolerate should play an important role when you pick the individual investments for your portfolio. There is a trade-off between risk and return--the higher the risk, the greater the expected return on the portfolio. On the flip side, however, the potential for losses is greater with a risky portfolio. The lower the risk of a portfolio, the greater the chance of earning a lower rate of return, but the potential for losses is lower too. So if you have a long-term investment objective--say, retiring in 25 years--you can take on more risk than if your objective is just two or three years away.

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