Imagine you want to buy a house - base on your savings and income, you could work out, or the bank can tell you, how much you can borrow (risk capacity). In your own mind or budget plan, you could have a figure as to how much you want to pay for the mortgage (risk appetite).
Obviously some borrow more than what they can afford, in which case, the risk appetite is higher than risk capacity, but for rational investors it should be another way around.
Am I too far off track?
Last edited by a moderator: Aug 21, 2012