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Risk tolerance drives asset allocation decisions Recent market volatility has made it more important than ever to consider the relationship between risk and return when investing. Investors want high return on their investments, yet they also want to know their money will be available to meet their needs.  When you invest, the weight you give each of these two desires is commonly known as your risk tolerance. Knowing your risk tolerance will help you identify your investment profile and decide how to allocate your assets. Risk tolerance factors Your risk tolerance depends on many things, including: Your goals and time frames. You most likely have several goals—such as your children's education, a vacation home or an early retirement. You may be willing to take more risk with some goals than with others, depending on your time horizon for each goal. Personality. Some people are simply more predisposed to take lesser or greater risk. Income and asset base. The larger your income and asset base, the more risk you may be willing to take, again depending on your time frame. Some investors with a  large asset base, however, may choose a more conservative approach, knowing they don't need to take on additional risk to meet their goals. Investor profile  How do you use this information to assess your risk tolerance? Your financial advisor can ask you some questions that will help you clarify your attitude toward risk. For example, your financial advisor might ask you about your primary investment goals, whether preservation of capital, income or growth. You may explore the degree to which you are comfortable with the value of an investment fluctuating. Your answers to the questions will place you on a spectrum of risk tolerance from conservative to aggressive. Merrill Lynch has identified five investor profiles that describe the ways in which investors generally characterize their objectives and their feelings about risk. The profiles are: capital preservation, income, income/growth, growth and aggressive growth. Asset allocation Once you determine your investor profile, the investment strategy known as asset allocation comes into play.  Asset allocation seeks to reduce the effects of market fluctuations by balancing the characteristics of stocks, bonds, cash and, in appropriate cases, alternative investments such as hedge funds and private investments. Because the asset categories do not usually gain or lose value concurrently, including more than one of them in a portfolio can reduce volatility over time by offsetting setbacks in one category through gains in another. Periodic review Over time, you may need to change your portfolio's investment mix, depending on your life circumstances, your investing time frames and market performance. Your financial advisor can help you evaluate your portfolio periodically in light of your goals and tolerance for risk and can help determine if you are on the right track to achieving your goals. Editor's note: David Brockway is a financial consultant with Merrill Lynch and can be reached at 720-9408 or e-mail Brockway at  David_Brockway@ml.com.