 In this section, I will tell you how risk tolerance plays a significant role in portfolio selection process. So firstly we will discuss what is meant by risk tolerance. So basically risk tolerance is a measure of how much of a loss an investor is willing to undertake when he decides to invest in a certain investment opportunity or is investing in a portfolio or is making a portfolio he can bear at least as much loss as possible. So that helps you in deciding what is the level of risk tolerance for this individual. So we can segregate people on the basis of the different levels of the tolerance of risks they have. Any individual investor's age, income, total savings, wealth status, all these things influence risk tolerance. So risk tolerance can be high or low depending upon a number of factors such as the age of an individual or an investor or they already have so many savings or their family is integrated. Integrated means that if I have any loss, then my sister or brother will come to help me or not. So this also influences my risk tolerance. So risk tolerance plays a very important role in portfolio selection. So if your risk tolerance level is very high, that is, you are involved in a very big loss, your financial position, your wealth, your family background, you are supported for this, that if you have a very big loss, then you will not be shocked, you will be involved in financial shock. In this kind of situation, the level of risk tolerance will be very high and similarly, if you do not have money or you do not have financial support or you do not have a very big wealth, if you do not have a very valuable value in your account, then your small loss will also hurt. In this case, your risk tolerance level there is a possibility that risk tolerance level in this case will be low. So it depends upon a number of different types of factors. Now another important thing is that we discussed earlier that there could be personal factors. Like my age, my pocket, my money, my income, all these things also influence my risk tolerance. But at the same time, the overall economic situation in which you live in, the political events there, in that particular country or in that particular sector, the regulatory authority, what is its role? Law, governance, judiciary, what is the level of all these things? This will also play a very important role in your risk tolerance. And if you know that I will make a particular investment and some people will betray me. And my judiciary system is so strong that no one can save me from cheating. And it will be caught. It will be fine charged. And my losses will be recovered. And there is a very high chance that no one can cheat me. In that case, your risk tolerance is higher. But if you know that people will cheat me and run away and never catch me, in that kind of a situation, obviously you will be reluctant to face the high risk situations where there is high risk involved. So it's not just the personal factors that play an important role in determining the risk tolerance level. Apart from this, the volatility fluctuation of the stock market you often see that the stock market has crashed and is doing a very good business. So these are the indicators of the volatility of the stock market. The volatility of the stock market, the swings in the stock market, all the other things are the conditions of IMF. I MF has paid, South Europe has kept us $$. South Europe has said, just return us $$, all these things also influence your risk tolerance level. So for the assessment of risk tolerance, there are organisations where you can assess your risk tolerance that you make assessments Assets are high risk, low risk, neutral level risk and according to that you will decide there could be a number of different asset classes. For example, I wanted to invest in a certain financial instrument so I talked to the manager of that particular organization. They told me that there are these different asset classes. One is where there is a high return but there is a high risk category or asset class in which you will invest in which you will get very little return but you will not get much loss. So organizations or financial institutions classify different assets on the basis of risk. So again, it is not essential that if you see that this is a safe opportunity, then you stay safe overall with the fluctuations in the market conditions. There could be a number of different other factors that can cause fluctuations due to which the safe opportunity can cause some loss. So it keeps on fluctuating so we have to look at that particular aspect also. So together we can, if we categorize or we make a list of the factors which can influence our risk tolerance. So in that we discussed personal factors. There could be another very important thing that is the time horizon. How much time period are you investing? If you have invested for 20 years, then naturally time horizon has increased. There can be a risk factor that the organization in which you have invested that organization collapses, that organization becomes very successful. There could be 110 factors. So people therefore avoid investing in this particular financial instrument for a very long time period. And if they do, then the organization has to offer a very high rate of risk to overcome this particular risk. So time horizon influences risk tolerance. Your future earning capacity influences risk tolerance. How much money can you earn in the future. That thing will influence your risk tolerance. If you feel that in the future, if I retire and my income falls down, which I am earning now, then you don't take much risk. And if you feel that no, I have got a long way to go and I can earn more money by investing or working or making food or whatever. So in that case you will be, your risk tolerance will become higher. You can get a higher level of risk. So your risk tolerance increases. And one more important thing is that what is your home situation, financial support, then you can get pension, social security. If something goes wrong, there is a loss, an accident, or a layoff that is being taken out of the job, then what is the status of social security? Will the government help you or not? Or what status of inheritance do you have? So inheritance means that those who are going to get money from the parents or those who have got it, they are a little more. This also can influence your risk tolerance very much. Now, on the basis of risk tolerance, we can classify investors into three categories. So we can have aggressive investors whose risk tolerance level is quite high and they participate in the market very rigorously. If they have a high level of risk associated with a financial instrument, they would like to go for that. They will invest in it. They do high purchases, buying, selling. And that is why they are called aggressive investors because they have got a higher risk tolerance level. On the contrary, we can have another class in which we can have conservative investors. They think a lot and invest a lot of time. And their financial risk tolerance level is quite low. So they think that there is very little loss. Even if there is very little loss, it will be shocking for us. They always focus on investing carefully. They don't invest frequently. They invest very carefully. They invest in very low level of risk investment opportunities. So we can have the conservative investor and we can have aggressive investors. So these are the two extremes. We can have investors who are ready to go for moderate risk. We call them moderate risk investors. They always invest on those particular opportunities. We will invest in a place where moderate risk is very low and very high. So we have got this third category that falls somewhere in the middle and they are known as the moderate risk investors. So we have got aggressive investors and we have got the moderate risk investors and then we have got the conservative investors. So these are the three categories on the basis of which we can classify investors on the basis of the level of financial risk tolerance they have.