Introduction
Investment risk is defined as exposure to the possibility of loss. This means that future returns may not match the returns that were expected at the time of investment. According to investment theory investments with higher levels of risk should have higher expected returns. However, these higher expected returns are also associated with a higher probability that an investor will suffer a loss. Every investor has a unique tolerance for risk and determining an investor's level of risk tolerance is not always an easy process.

Determining an investor's risk profile, however, is an important first step in developing an investment plan. Both an investor's ability to tolerate risk and their perceptions of risk will change over time. When in doubt, assume you have a low tolerance for risk when you first start investing. You can always adjust your level upward if you need to. This may help you prevent a loss on a high risk investment that is not appropriate for your level of risk tolerance.

Assessing investor risk tolerance is more art than science. The following survey and those that can be accessed on the related sites will help you gain a perspective on your level of risk tolerance. There are no right or wrong answers to the questions, and you may find the results do not match your perceptions on your ability to assume risk.

This survey was developed by two university personal finance professors, Dr. Ruth Lytton at Virginia Tech and Dr. John Grable at Kansas State University.

Questions 1 - 4
1. In general, how would your best friend describe you as a risk taker?
A real risk avoider
Cautious
Willing to take risks after completing adequate research
A real gambler

2. You are on a TV game show and can choose one of the following.
Which would you take?
$1,000 in cash
A 50% chance at winning $5,000
A 25% chance at winning $10,000
A 5% chance at winning $100,000

3. You have just finished saving for a "once-in-a-lifetime" vacation.
Three weeks before you plan to leave, you lose your job. You would:
Cancel the vacation
Take a much more modest vacation
Go as scheduled, reasoning that you need the time to prepare for a job search
Extend your vacation, because this might be your last chance to go first-class

4. Given the best- and worst-case returns of the four investment choices below, which would you prefer?
$200 gain best case; $0 gain/loss worst case
$800 gain best case; $200 loss worst case
$2,600 gain best case; $800 loss worst case
$4,800 gain best case; $2,400 loss worst case

Questions 5 - 8
5. Some experts are predicting prices of assets such as gold, jewels, collectibles, and real estate (hard assets) to increase in value; bond prices may fall, however, experts tend to agree that government bonds are relatively safe. Most of your investment assets are now in high-interest government bonds. What would you do?
Hold the bonds
Sell the bonds, put half the proceeds into money market accounts and half into hard assets
Sell the bonds and put the total proceeds into hard assets
Sell the bonds, put all the money into hard assets, and borrow additional money to buy more

Question 6. how comfortable are you investing in stocks or stock mutual funds?
Not at all comfortable
Somewhat comfortable
Very comfortable

7. If you had to invest $20,000, which investment choice would you find most appealing?
60% in low-risk investments 30% in medium-risk investments 10% in high-risk investments
30% in low-risk investments 40% in medium-risk investments 30% in high-risk investments
10% in low-risk investments 40% in medium-risk investments 50% in high-risk investments

8. Your trusted friend, an experienced geologist, is putting together a group of investors to fund an exploratory gold mining venture. The venture could pay back 50 to 100 times the investment if successful. If the mine is a bust, the entire investment is worthless. Your friend estimates a 20% chance of success. If you had the money, how much would you invest?
Nothing
One month's salary
Three month's salary
Six month's salary

Questions 9 - 13
9. If you unexpectedly received $20,000 to invest, what would you do?
Deposit it in a bank account, money market account, or an insured CD
Invest it in safe high quality bonds or bond mutual funds
Invest it in stocks or stock mutual funds

10. Suppose a relative left you an inheritance of $100,000, stipulating in the will that you invest ALL the money in ONE of the following choices. Which one would you select?
A savings account or money market mutual fund
A mutual fund that owns stocks and bonds
A portfolio of 15 common stocks
Commodities like gold, silver, and oil

11. In addition to whatever you own, you have been given $1,000 to invest.
You are now asked to choose between two investment possibilities:
A sure gain of $500
A 50% chance to gain $1,000 and a 50% chance to gain nothing

12. In addition to whatever you own, you have been given $2,000 to invest.
You are now asked to choose between two investment possibilities:
A sure loss of $500
A 50% chance to lose $1,000 and a 50% chance to lose nothing

13. When you think of the word "risk", which of the following words comes to mind first?
Loss
Uncertainty
Opportunity
Thrill

Investment Risk Tolerance Results

Your Score: 0
You have a low tolerance for risk.
The following questions were not answered: 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12 and 13.

Score	Risk Tolerance Level
0-18	Low tolerance for risk
19-22	Below-average tolerance for risk
23-28	Average/moderate tolerance for risk
29-32	Above-average tolerance for risk
33-47	High tolerance for risk

Dr. Ruth Lytton and Dr. John Grable, the professors that developed this questionnaire, have done extensive research in trying to quantify investor risk tolerance. In addition to the general risk assessment provided by this survey they have found that people with higher levels of income, education, and knowledge of personal finance have more risk tolerance. Your investment time horizon is also a factor, and people who can invest for a longer time period can generally assume more risk than those investing for shorter periods. It has also been found that gender is a minor factor in explaining risk tolerance with women having a slightly higher tolerance for risk than men do. The mutual fund tutorial provides additional information on appropriate investments based on some of these risk factors.