Final answer:
There is a positive relationship between an investor's risk tolerance and the amount of risky assets they hold in their portfolio. Higher risk tolerance leads to a greater proportion of riskier assets, like stocks, which offer the potential for higher returns to compensate for their greater risk.
Step-by-step explanation:
The relationship between an investor's risk tolerance and the amount of the risky asset they hold in their portfolio is generally a positive one. Investors with a higher risk tolerance are more likely to hold a greater proportion of riskier assets, like stocks, which have the potential for higher returns to compensate for their increased risk. On the other hand, investors with lower risk tolerance may prefer safer investments, like bank accounts or bonds, which offer lower returns but also lower levels of risk.
Investment decisions are a balance between the desire for returns and the ability to endure risk, often influenced by personal preferences and financial goals. This is why examining risk and return within different time frames can be useful, as some investments may perform better over longer periods despite their higher risk in the short term.