Assessing Risk Tolerance: Questioning the Questionnaire Method

Yook, Ken C.; Everett, Robert
August 2003
Journal of Financial Planning;Aug2003, Vol. 16 Issue 8, p48
Academic Journal
This study examines whether different questionnaires produce a consistent risk tolerance score for the same investor and the relation between the risk tolerance scores and the percent of stock in portfolios investors hold. Six questionnaires are tested in this study. Many financial services firms post risk-tolerance questionnaires on their web sites. The Johns Hopkins University's Master of Business Administration program is designed specifically for full-time professionals engaged in part-time study. A total of 113 students filled out the questionnaires. To investigate the relationship between demographic characteristics and risk tolerance, univariate and multivariate analyses are conducted. Inspection of the results shows that sex and household income appear to have a substantial effect on risk tolerance. Risk tolerance scores are 74.43 for males and 70.65 for females. No apparent pattern emerges when classified by age. A positive relationship between income and risk tolerance is consistent with the view that absolute risk aversion decreases as wealth increases. Risk tolerance of all six questionnaires have a significant effect on the percentage of stock holdings. Although the risk tolerance score is significantly related to stock holding, the explanatory power varies greatly.


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