Investor’s Risk Tolerance

Investor’s Risk Tolerance

Part 1 Response

A number of factors influence an investor’s willingness to take risk by committing his/her finances and resources towards a given project. Risk tolerance, which simply refers to the magnitude of loss investors are prepared to incur in investment decisions, is determined by factors such as the investor’s age, goals, comfort level, and size of the investment portfolio (Corporate Finance Institute, 2021). This suggests that taking risk is a personal decision that cannot possibly be determined by external forces. However, in an era where the media, particularly social media, is a key source of information on which individuals make decisions, it may be argued that media is one of the forces influencing an investor’s risk tolerance. According to Abu-Taleb & Nilsson (2021), risk-taking behaviors are influenced, to some extent, by opinions informed by textual information drawn from the internet and other media sources. As an example, catchy advertisements and compelling news on certain projects may influence or dissuade potential investors into taking risks. All investments contain an element of risk, but financial futures are regarded as a very risky undertaking since they are highly sophisticated, reason being that futures are made “against changing values” (Reed, 2018 para.4). Futures contracts typically involve buying or selling assets at a certain date and at a certain price. Because of this, the most important risk in financial futures is interest rate risk: futures offer minimal control over the investor’s risk profile.

Part 2 Peer Response /Dani

This is such a precise answer to the question of whether or not media and/or government influences investor risk tolerance. You have not only provided a detailed definition of what risk tolerance means; you have excellently tied this definition with the role of media in investment decisions. The examples of media influence on risk tolerance are sufficient and practical. However, you seem to have omitted the second part of the question: which is the most important risk in financial futures trading? Again, could you elaborate further on how government officials influence risk tolerance among investors?

References

Abu-Taleb, S. K., & Nilsson, F. (2021). Impact of Social Media on Investment Decision: A quantitative study which consider s information online, online community behaviour, and firm image. http://umu.diva-portal.org/smash/get/diva2:1566008/FULLTEXT01.pdf

Corporate Finance Institute. (2021). What is risk tolerance? https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/risk-tolerance/

Reed, E. (2018). What are futures and what are the risks? www.thestreet.com/investing/futures/what-are-futures-14763379

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