Determinants of Financial Risk Tolerance (FRT): An Empirical Investigation

Abstract

Investors’ capacity to accept risk when making a financial investment decision is popularly known as Financial Risk Tolerance (FRT). Financial advisors and managers are focused on understanding a client’s risk profile before giving any financial advice, and FRT is the most influential factor when investors choose among competing investment avenues. The current study analyzes the impact of various demographic factors, personality type, and financial literacy on the FRT of individual investors. We used a single cross-sectional descriptive research design, and collected data with the help of a structured questionnaire using a convenience sampling method. We found that personality type and financial literacy, along with gender, income, marital status, occupation, and number of dependents, significantly influenced the FRT of investors, while investors’ age and level of formal education were not significant in the determination of FRT.

TOPICS: Wealth management, risk management, quantitative methods, statistical methods

Key Findings

• ▪ Personality Type A positively correlated with Financial Risk Tolerance.

• ▪ Financial literacy positively influenced Financial Risk Tolerance, while formal education played an insignificant role.

• ▪ Gender, income, marital status, occupation, and number of dependents significantly influenced the Financial Risk Tolerance of investors.