Risk appetite is how much risk you are comfortable taking to achieve your financial goals. A 25-year-old with decades until retirement can afford aggressive investments (high risk appetite). A 60-year-old nearing retirement needs to protect capital (low risk appetite). It is personal, and there is no right or wrong level.
Three general categories: conservative (capital preservation) — mostly bonds and fixed deposits; moderate (balanced growth) — mix of stocks and bonds; aggressive (maximum growth) — heavily in equities, emerging markets, and alternatives. Your risk appetite should match your time horizon, income stability, and financial obligations.
For companies, risk appetite is formalized in a Risk Appetite Statement (RAS) approved by the board. Banks define exactly how much credit risk, market risk, and operational risk they will accept. After the 2008 crisis, regulators like the Basel Committee require financial institutions to clearly define and enforce their risk appetite frameworks.