What is risk tolerance and how is it measured?
Risk tolerance is a measure of how much uncertainty a stakeholder or an enterprise is willing to take on in exchange for potential value.
There are three broad ways of describing a company's attitude toward risk in general:
- Risk aversion: When a company is risk-averse, it means that their preference is to not take risks or there is an unwillingness to accept much uncertainty.
- Neutrality: When a company is risk-neutral, it means that their attitude toward risk allows some level of risk to be acceptable, just as long as when the risk does occur, there is no loss of any kind.
- Risk seeking: When a company is risk-seeking, it means that they are willing to take on more ...