An Empirical Investigation of the Relation between Risk Tolerance and Socioeconomic Characteristics of Individual Investors

Syed Tabassum Sultana () and S. Pardhasaradhi
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Syed Tabassum Sultana: Department of Business Management, Matrusri Institute of PG Studies, 16-1-486, Saidabad, Hyderabad (A.P.), INDIA

Advances In Management, 2011, vol. 4, issue 10

Abstract: Assessment of risk tolerance is an essential consideration for optimum asset allocation within an investment portfolio. It is crucial in determining and achieving long-term investment goals. If the risk tolerance is based on a rational and informed evaluation, then the investor is prepared for a trade off between returns and the degree of risk leading to mitigation of risk related problems and optimization of returns. For example, individuals with low risk tolerance may not achieve expected investment goals in the long term. They may experience opportunity losses for not investing in stocks. Similarly, individuals with high-risk tolerance levels may unnecessarily lose wealth for not investing in short term investments. This empirical study is designed to determine the subjective risk tolerance level of Indian individual investors and discover the relationship between investors’ socioeconomic characteristics (such as marital status, education occupation earnings, number of dependents etc.) and risk tolerance. Statistical technique chi-square is used to explore the relationship. The research concludes that investors’ socioeconomic characteristics such as Marital status, Earnings, Occupation and number of dependents are dependent on risk tolerance but Educational level, regularity of investment decision and basis of investment decision are independent of risk tolerance level of the Indian individual investor. The finds could constitute vital input for the investment product designers to design financial products that can cater to the individual investors’ requirements.

Date: 2011
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