Presentation on theme: "Grace Piggott Junior University of Wisconsin Stout Advisor Dr. Fassil Fanta."— Presentation transcript:
Grace Piggott Junior University of Wisconsin Stout Advisor Dr. Fassil Fanta
Risk tolerance is defined as the degree of variability in investment returns that an individual is willing to withstand. High risk tolerance: Investors are more aggressive in their investments. They are happy with higher risk levels in exchange for possibly making higher returns. They are also willing to take higher losses believing they will make more in the long run. Low risk tolerance: Investors are less aggressive in their investments. They tend to feel more comfortable knowing their low risk investments could equate to lower returns. Most people are not willing to take above average risks to obtain above average returns on their investments (Avery & Elliehausen, 1986). Why does this matter? Knowing what socioeconomic characteristics affect one’s risk tolerance would allow for financial advisors and others to understand why some people are more or less cautious about investments than others. Having this information will likely allow financial advisors to give more accurate investment advice based off an investors characteristics.
What socioeconomic characteristics determine the risk tolerance of individual investors? Hypothesis: Individual investors risk tolerance is influenced by socioeconomic characteristics such as income, education, and family structure. Benefits to knowing what characteristics impact risk tolerance: 1.Allows for financial advisors and economists to gain a better prospective on the matter. 2.Allows financial advisors to give more accurate investing advice. 3.Gives individuals a better understanding of how their socioeconomic characteristics may impact their investment options.
» In the Federal reserve bulletin Bricker et al. (2012) stated, “Family’s finances are affected by both their own decisions and the state of the broader economy.” » Sulaiman (2012) stated, “An investors ability to handle risk may be related to demographic features such as age, gender, marital status, occupation, income, time horizon, liquidity needs, portfolio size, investment knowledge, and attitude towards price fluctuations”. » Grable and Lytton (1998) however felt that assuming someone’s age impacts their risk tolerance could create potential problems. » Both Sudaiman (2012) and Grable and Lytton (1998) said that it is commonly believed men will take more risks than woman. Women tend to live longer, tend to have lower lifetime earning potential, and are more likely to be single parents than men so Grable and Lytton (1998) felt that woman had a larger need to increase their risk in order to assure they could meet their financial needs. » Finke and Huston (2003) felt that those with higher education tend to have a higher risk tolerance because they commonly have more financial knowledge.
» The data I used for this research was collected from consumer finance surveys between 1992 and 1998. The dollar amounts were all converted to thousands 2010 dollars. » I also reviewed data from the Federal Reserve Bulletin titled Changes in US family finances from 2007 to 2010: Evidence from the consumer finance published in June of 2012.
VariablesDefinitions Percentile incomePercent of others earning less than you. AgeYears since date of birth. Family structureRelationship status, children or no children. EducationAmount of schooling completed RaceCategorizing by similar biological traits.
» Based off the data I have noticed some trends… It appears that percentile income and risk tolerance are positively related. The higher a persons percentile income the higher their average income was, the higher the percentage of families who saved was, and the more percent of assets they held. As for age I did not feel there was strong enough evidence to make any reliable conclusions. When examining family structure it appears couples have higher risk tolerance than those who are single, specifically couples without children.
» It also seems that education and risk tolerance are positively related to one another. The more education someone had the larger their average income was, the higher the percent of families who saved was, and the more percent of assets they held was. » As for race it appears that whites have higher risk tolerance than non whites. Whites had higher average incomes, higher percentages of families that saved, and higher percentages of assets held. However I feel that data could have been represented in a better way that would give more reliable results. I did notice also that between 1992 and 1995, Whites average income increased by 3.6% while non whites income only increased by 0.2%. I also noticed that between 1992 and 1995, whites percent of savings only fell by 3% while non whites fell by 7.1%.