Effects of Market Returns and Market Volatility on Investor Risk Tolerance

The 2008 credit market debacle and subsequent "Great Recession'' accompanied by the stock market crash of 2008 has caused many investors and their advisors to reevaluate their risk tolerance and investment asset allocation choices. Additionally, marketers for many financial institutions and investment advisors are rethinking the strategies and tactics they use for both individual and corporate clients about the level of risk that is appropriate to meet their investment objectives. This research shows that an investor's risk tolerance is not as stable as it has been portrayed previously in the literature and can be affected by both the direction of movement and the volatility in the market. In addition, this research provides some suggestions on how to frame investment decisions for individual investors to better assess their actual risk tolerance in the face of a volatile market.