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1.1 Risk Capacity, Appetite and Tolerance First step of any risk management learning is to understand following three important terms: Risk Capacity Risk Tolerance Risk Appetite Let us understand the difference between Risk Capacity, Risk Appetite and Risk Tolerance: Parameter Descriptions Risk Capacity Maximum risk an organization can afford to take. Risk Tolerance Risk tolerance levels are acceptable deviations from risk appetite. They are always lower than risk capacity. Risk Appetite Amount of risk an organization is willing to take. Let us understand this with an practical example: Mr. A’s total saving is $1000. He wants to invest in equities to earn some income. Being risk conscious, he decides to invest only up to $700. If the markets are good he is willing to further invest $50. Risk Capacity: Total amount available i.e. $1000 RIsk Appetite: His willingness to take risk i.e. $700 Risk Tolerance: Acceptance deviation from risk appetite