Risk Tolerence

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by

Dr. Ebrahim Kunju Sulaiman

May 21, 2012

Associate Professor, School of Management and Business Studies,

Mahatma Gandhi University, Kottayam, Kerala, India-686560

www.mgu.ac.in; www.smbsmgu.org

Telephone: (+91) 9441673667; Email: [email protected]

2nd Annual International Conference on Accounting and Finance

(AF 2012)
mailto:[email protected]://www.mgu.ac.in/mailto:[email protected]:[email protected]:[email protected]:[email protected]://www.mgu.ac.in/mailto:[email protected]


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Introduction

Review of Literature

Objectives of the Study

HypothesisMethodology

Findings of the Study

Conclusions

Back up


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Introduction FINANCIAL RISK TOLERENCE

Financial risk tolerance is commonly defined as the maximum

amount of volatility one is willing to accept when making afinancial decision.

Risk tolerance plays an important role in each household's

optimal portfolio decisions.

An investors ability to handle risks may be related to

demographic features such as age, gender, marital status,

occupation, income, time horizon, liquidity needs, portfolio size,

investment knowledge, and attitude toward price fluctuations.

The demographic features could be used to distinguish between

levels of financial risk tolerance and an association of these

variables could be developed to predict a persons risk-

tolerance.


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Review of Literature FINANCIAL RISK TOLERENCE

Older individuals tended to be less risk tolerant than youngerpersons(Kogan,1961).

Prevalent belief in our culture is that men should and do takegreater risks than women (Slovic,1966) . Marital status is a factor that significantly influences risk andreturn preferences(Lazzarone,1996).

Other things being equal, different occupations can be used to

differentiate between levels of financial risk tolerance (Roszkowski, M.j;Snelbecker, G.E; and Leimberg, S.R ,1993).

A positive pattern between income and financial risk tolerance hasbeen observed (Cohn, RA; Lewellen, WG; Lease, R.C and Schlarbaum,G.G ,1975; Cicchetti and Dubin,1994; and Shaw, 1996). A persons level of formal education has been found to influencerisk tolerance (Baker and Haslem, 1974; and Grable and Lytton, 1998). A persons knowledge of personal finance and economicexpectations may play a role in shaping risk preferences (Grable andJoo,1997; Grable and Lytton,1997; and Sung and Hanna, 1996)


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Objectives and Hypothesis FINANCIAL RISK TOLERENCE

To assess the financial risk tolerance of individual investors.

To examine the dependence/independence of the demographic factors

of the investors and his/her financial risk tolerance.

B.Gender and financial risk tolerance of individual investors are independent

of each other (H0).

Increase in age decreases the financial risk tolerance of individual investors(H1: 0).

No association between marital status and financial risk tolerance of

individual significant investors (H0).

Greater levels of attained educational levels are associated with increased

financial risk tolerance of individual investors (H1).High income earners are more financial risk tolerant than lower income

earners (H1: 0).

There exist a negative relationship between the number of dependants and

financial risk tolerance of individual investors (H1: 0).


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FINANCIAL RISK TOLERENCE

The data were obtained from a survey of employees of two universities

in India such as University of Kerala and Mahatma Gandhi

University. 10 percent of all employees (N=3000) i.e. 300 respondents

were selected as sample units for the study. The survey was held

during the month of December 2010.

The respondents received a risk-tolerance assessment questionnaire of

FinaMetrica developed by an Australian company. It is a commercially

provided computer-based risk tolerance measurement tool. This tool is

widely used by leading academic educators and researchers around

the world.

Financial risk tolerance, as determined by each respondents score on

the risk assessment measure developed byFinaMetrica was used as the

dependent variable. It consists of 24 questions along with a number of

demographic variables.

The association/relationship between financial risk tolerance score and

various demographic factors have been investigated with the help of

statistical tools such as Chi-square test and Correlation analysis.


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(a) Gender Vs Financial Risk Tolerance

It is found that the calculated value of 2 (5.939) is less than thetabulated value (5.991) and thereby the null hypothesis is to be

accepted (d.f = 2; p < 0.05.). Thus, it is to be concluded that gender

and financial risk tolerance are independent of each other.

(b)Age Vs Financial Risk Tolerance While testing the significance of the Pearsons correlation

coefficient between the two variables shows that the calculated

value (r=0.2614,t= 6.417, d.f = 288, p


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(c) Income Vs Financial Risk Tolerance

The testing of significance of the Pearsons correlation coefficient betweento the two variable shows that the calculated value (r=0.9924,t= 16.97, d.f

= 288, p


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The present study revealed that most of the anticipated association/

relationship between financial risk tolerance and each of the

demographic variables from the literature were found to be relevant.

The study supports the common beliefs that single people are more risk

tolerant than married ones; high income earners are more risk tolerant

than lower income earners; and number of dependants could affect the

level of financial risk tolerance. It also indicates that higher levels of

formal education increases ones ability to evaluate risk and therefore

gives a higher financial risk tolerance.

It is generally thought that financial risk tolerance of individual

investors decreases with their age. But, the present study fails to support

this view, or even provide evidence to the contrary.

However, the analysis of different demographic factors with financial

risk tolerance indicates that the demographic features of individual

investors could be used to distinguish between levels of financial risk

tolerance and an association of these variables could be developed to

predict a persons risk-tolerance.


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RISK TOLERENCE

The author wish to thankFinaMetrica

Risk Profiling System for grantingpermission to use their FinaMetrica

tool for the research and educational

purpose


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Variables Definition

Gender 1 = male

2 = female

Age Age (25-75)

Marital Status 1 = married

2= unmarried

Education 1 = undergraduate

2 = postgraduate

3 = above Postgraduate

Annual Income Amount in Rupees

Number of dependants 1= Only yourself

2=1 person in addition to yourself3=2 to 3 persons in additions to yourself

4=more than 4 persons in additions to yourself


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Back up:- Risk Profile of the Sample Respondents

Low Risk Group

(Risk Group 1 and II)

0-34 60 (20%)

Medium Risk Group(Risk Group III and IV)

35-54 102 (34%)

High Risk Group

(Risk Group V, VI and VII)

55-100 138 (46%)

Total 0-100 300 (100%)


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Gender-wise Classification of sample unit by Risk Group

Risk Group Male Female Total

High 32 28 60

Medium 36 66 102

Low 66 72 138

Total 134 166 300


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Marital Status of sample unit by Risk Group

Risk Group Married Unmarried Total

High 13 47 60

Medium 72 30 102

Low 56 82 138

Total 141 159 300


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Educational Status of sample unit by Risk Group

Risk Group UG PG Above PG Total

High 17 18 25 60

Medium 44 13 45 102

Low 37 48 53 138

Total 98 79 123 300


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Appendix

GSTF\AF paper\Risk tolerence\SevenRiskGroups.pdf

Risk Tolerence

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