Generation X: Understanding Their Risk Tolerance and Investment Behavior

Schooley, Diane K.; Worden, Debra Drecnik
September 2003
Journal of Financial Planning;Sep2003, Vol. 16 Issue 9, p58
Academic Journal
This article presents a study which explored the risk tolerance and investment behavior of Generation X members, those born in 1964 through 1980, by evaluating their propensity for risk-taking, as well as their attitude toward risk, their capacity for risk and their knowledge of risk. Part of understanding investors is discovering how they view risk. One study presents a four-component framework called RiskPACK for evaluating investors' risk tolerance. The four components of risk tolerance are propensity, attitude, capacity and knowledge. Investors' propensity to incur risk refers to their financial decisions. For example, an investor with a high propensity for risk may short-sell stock or speculate in options. One suggested measure of propensity is the ratio of high-risk to low-risk investments in an investor's portfolio. Because risk is defined as uncertainty in returns, and equity securities historically have exhibited the highest standard deviation in returns, an investor's propensity for risk can be measured by the percentage of financial assets held in equity securities. On the other hand, attitude refers to investors' willingness to incur monetary risk. Adult generations allegedly have vastly different experiences with, and therefore different attitudes toward, monetary risk.


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