Final answer:
The assertion that risk capacity is related to the level of financial risk one is willing to take with their money is true. Risk capacity is crucial in investment decisions, alongside understanding the expected rate of return, the risk of deviations, and liquidity.
Step-by-step explanation:
The statement "risk capacity is how much risk you are willing to take with your money" is true. Risk capacity defines an individual's or an institution's ability to withstand financial losses in their investments and financial activities. It is determined by various factors, including financial goals, investment horizon, income, wealth, and personal circumstances.
This concept is different from risk tolerance, which is more subjective and deals with the level of volatility in investment returns that an investor is willing to withstand.
When we consider investments, we analyze them based on three main factors: the expected rate of return, the risk that this return will deviate from expectations, and the investment's liquidity.
A high-risk investment can result in returns that significantly diverge from the expected rate, either positively or negatively.
Conversely, a low-risk investment tends to offer returns that are more closely aligned with the expected rate over time. Understanding one's risk capacity can guide investment decisions, aligning them with personal financial goals and the need for security.