Let's first define risk. Generally, risk refers to the tendancy for investments to change in value from time to time. In mutual funds, risk tolerance is normally associated with the degree of fluctuations in the price of bond or stock funds. Conservative risk tolerances will accept lower returns to minimize price volatility. Aggressive risk tolerances seek the highest returns and will accept large swings in price volatility.
T here are two contrasting viewpoints regarding the application of risk tolerances.
Using the fund type method, conservative, moderate or aggressive risk tolerances can combine with a variety of return objectives, subject to certain time horizon restrictions. L et's look at a couple of hypothetical situations that use the fund type method of risk tolerance. In the the first scenario, Jones and Smith share nearly identical investment objectives. Smith a conservative risk tolerance. Each wants to add one fund to an existing portfolio.