Risk capacity explains how easily a person can absorb fluctuations in value and losses on their investments without entering into financial difficulties. A person's risk capacity is dependent on many individual factors, such as their income, assets, debts, financial obligations or investment horizon.
For example, debt-free, childless, double-income couples, who live in their own home and have paid off their mortgage, generally have a higher risk capacity than low-income couples of the same age with children in compulsory education, a sizable mortgage and few assets.
Risk capacity is closely linked with risk tolerance. Together they form an investor's risk profile. Risk tolerance expresses how well a person can handle fluctuations in value. In other words, whether a person is at all prepared to accept losses and to what extent. This is dependent on the subjective estimation and evaluation of risk. A person's individual investment strategy can be determined on this basis.