ASSESSING FINANCIAL RISK TOLERANCE OF PORTFOLIO INVESTORS USING DATA ENVELOPMENT ANALYSIS

Parisa Hosseini Ardehali (), Joseph C. Paradi () and Mette Asmild ()
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Parisa Hosseini Ardehali: Department of Mechanical and Industrial Engineering, University of Toronto, 200 College Street, Toronto, ON M5S 3E5, Canada
Joseph C. Paradi: Centre for Management of Technology and Entrepreneurship, Department of Chemical Engineering and Applied Chemistry, University of Toronto, 200 College Street, Toronto, ON M5S 3E5, Canada
Mette Asmild: Nottingham University Business School, Jubilee Campus, Wollaton Road, Nottingham NG8 1BB, United Kingdom

International Journal of Information Technology & Decision Making (IJITDM), 2005, vol. 04, issue 03, 491-519

Abstract: For some investors their own personal investment counsellors address their investment strategy; for others automated means are used. To protect investors, the Canadian Government has enacted the "Know Your Client" Act requiring that all investment dealers and vendors of securities must know their clients and advise them on the appropriate investment strategy. This paper uses Data Envelopment Analysis (DEA) in a novel manner by applying it to a large data set of answers to a number of psychological questions. A Slacks Based Model was used to estimate investor risk tolerance. The model analyses the risk profile of the investor and can be used as a guide to match the risk rating of the investment vehicles for the client. Statistical comparisons were also carried out to show how risk tolerance relates to various demographic variables. Finally, the DEA results were validated through comparisons with the commercial system already in use.

Keywords: Financial risk tolerance; data envelopment analysis; risk assessment; know your client (search for similar items in EconPapers)
Date: 2005
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Citations: View citations in EconPapers (9)

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DOI: 10.1142/S0219622005001660

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