risk tolerence
TRANSCRIPT
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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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FINANCIAL RISK TOLERENCE
(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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FINANCIAL RISK TOLERENCE
(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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FINANCIAL RISK TOLERENCE
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