How does risk tolerance differ from risk appetite?

Risk tolerance refers to the maximum level of risk that an organization or individual is willing to accept in the pursuit of achieving specific objectives. It represents the boundaries or limits of risk that are acceptable within the context of a decision-making process. Risk tolerance is typically defined in more concrete terms and can be measured in quantitative ways, such as specifying loss thresholds, maximum drawdowns, or specific limits on exposures.

In contrast, risk appetite encompasses a broader and more qualitative perspective on the types and levels of risk an organization is willing to take on overall. It reflects the general attitude towards risk and may also factor in the strategic goals and culture of the organization. While both concepts are related, risk tolerance is about the specific limits set, whereas risk appetite relates to the overall willingness to engage in risk-taking.

The other options do not accurately capture the distinction between the two concepts. A formal written statement is not the defining feature of risk tolerance, and risk appetite is not strictly less quantitative; rather, it is generally expressed in broader terms. Lastly, risk appetite is applicable to both individual investors and organizations, rather than being limited solely to individual outcomes.