Risk Appetite

Risk appetite is a term used by investors in financial markets, describing the behavior by traders to actively seek out exposure to uncertainty or risk with the hope of higher payoffs.

The term contrasts with risk aversion, which is defined as a trader's preference to limit their exposure to uncertainty or risk.

Risk appetite is a very trait of investors especially in times of prosperity, who seek to flock towards investments with an unknown payoff or outcome.

These traders will opt for less safe forms of investments that are either more volatile, have a less predictable outcome, and/or a higher expected payoff.

For example, an investor with risk appetite or risk-on trader will avoid low payoff options such as a certificate of deposit or bank account with a fixed interest rate.

Instead, these investors prefer such assets as stocks or forex, all of whom have higher but more uncertain payoffs.

Volatility is another factor impacting investors decisions. When there are greater signs of volatility or relative stability in markets, many investors shed their safe haven assets such as gold.

While these assets are preferred for their stability, they do tend to underperform in growing markets with higher consumer confidence and risk appetite.

Risk Appetite Explained

Risk appetite can have large overall effects on any market. For example, a risk on investor will look to increase their holdings of assets that are deemed less predictable.

This can include assets in emerging markets, volatile stocks, or specific currency pairs such as the NZD/USD and AUD/USD, among others.

In the forex market in particular, traders will actively strengthen their positions in higher-yielding assets and move their capital away from safe haven currencies.

Instead, lower rated or higher yielding bonds or corporate debt are considered risk on, as are emerging markets currencies.

These currencies are all considered less safe duet to the size of their capital markets and lower levels of liquidity.