In investing, variance—the fluctuation of price—and risk of ruin—I like to think of this as “unknowns”—are often confused with each other, that is risk is considered to be equivalent to the variance (standard deviation squared). More details here.
This is done because it’s the easy thing to do mathematically and write academic papers about it. It’s one of those assumptions that is so basic to financial theory that it underlies almost everything about modern portfolio theory. It is also a simplified view of risk.
They are likely to be two separate variables in a total risk tolerance calculation.
The first variable is the variance. You can compute the variance using historic price data using the methods learning in high school—it’s possible that this part of the curriculum has been moved to college to make it possible to create more high school graduates.
The second variable is “uncertainty”, specifically, it is unknown knowns, which through research and analysis can become known, and unknowns unknowns which can not be accounted for. This is what fundamental analysis is all about.
If you do not understand what I mean by “unknown knowns”, you should read this post. It’s very important to see the world in this fashion to do any kind of strategic planning.
Risk of ruin is related to uncertainty but considers your big picture—your portfolio (can be generalized).
I submit that as your risk of ruin goes down, variance tolerance probably goes up. In simple terms, if you’re not concerned about losing money, you can make bets with wider distribution curves, riskier bets.
For any kind of choice, though, what matters is not so much the variance but the expectation value. Unless the expectation value is >0, you can forget about it. Good trading systems are about finding E[X]>0 AND managing the technical aspect to ensure it stays that way. It is seldom that a book makes this point directly. Most are concerned about specific techniques to implement the edge (edge = positive expectation value) rather than researching the edge itself.
In highly efficient markets (like equity) the split (edge to no-edge) may be something like 51/49. It would be easier to trade currency and commodities—this is why they typically allow much higher leverage/margin. In that way traders can hurt themselves just as bad as they can in equity trading.