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Abstract
Do risk tolerance questionnaires predict risk-taking? Traditionally, investor preferences have been identified using risk tolerance questionnaires. However, there has been little focus as to whether the questionnaires are actually useful in predicting risk-taking decisions of investors and advisers. The purpose of this research was to review the existing literature and, using an online analytical survey, conduct a statistical analysis to determine the relationship between risk tolerance and risk-taking. The resulting quantitative analysis was complemented with qualitative interviews. The main findings are that return expectations and demographic variables are important predictors of risk-taking decisions, whereas risk tolerance questionnaires are not. A framework of two models was developed to better understand investment decisions. It forms the basis for a general discussion of the implications of these findings for practitioners and other stakeholders.
TOPICS: Wealth management, risk management, portfolio theory, portfolio construction
Key Findings
▪ Risk tolerance questionnaires do not predict risk-taking decisions by investors or advisers.
▪ Return expectations do predict risk-taking decisions by investors and advisers.
▪ Investor demographic factors (gender, marital status, net worth) and adviser demographic factors (education, licensing) also predict risk-taking.
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US and Overseas: +1 646-931-9045
UK: 0207 139 1600