Final answer:
Risk attitude is a person's general disposition towards risk, while risk tolerance is the amount of risk an individual is willing to accept. Adolescents' risk-taking can be attributed to different valuation of outcomes and time frames. Investors' preferences on the return and risk tradeoff are influenced by their risk tolerance.
Step-by-step explanation:
How do risk attitude and risk tolerance differ? Risk attitude refers to a person's general disposition towards taking risks, which can range from aversion to preference. Meanwhile, risk tolerance is the specific amount of risk an individual is willing to accept when making an investment or financial decision. Adolescents may be more likely to take risks compared to adults, even though they can evaluate risks and rewards because they may value the outcomes differently and are influenced by different time frames for the potential returns of their choices.
When a financial investor is faced with the tradeoff between return and risk, those with a higher risk tolerance may choose investments that could yield a high return but also come with a significant chance of loss. Conversely, individuals with a low risk tolerance would prefer investments that offer more modest returns but with less uncertainty and closer actual returns to the expected rate of return. Personal preferences and the importance placed on potential outcomes greatly influence these choices.