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The Journal of Wealth Management

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Risk Tolerance, Return Expectations and Other Factors Impacting Investment Decisions

Sam Sivarajan and Oscar De Bruijn
The Journal of Wealth Management Spring 2021, jwm.2020.1.124; DOI: https://doi.org/10.3905/jwm.2020.1.124
Sam Sivarajan
is a former investment counselor managing investments for high net worth and ultra-high net worth Canadians. He has recently completed his doctorate at the University of Manchester and this article is based on the findings from his doctoral thesis. Sam can be reached care of the Alliance Manchester Business School, UK
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Oscar De Bruijn
is an honorary research fellow at the University of Manchester. He was the thesis supervisor for the first author. Oscar can be reached care of the Alliance Manchester Business School, UK
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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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The Journal of Wealth Management: 25 (1)
The Journal of Wealth Management
Vol. 25, Issue 1
Summer 2022
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Risk Tolerance, Return Expectations and Other Factors Impacting Investment Decisions
Sam Sivarajan, Oscar De Bruijn
The Journal of Wealth Management Nov 2020, jwm.2020.1.124; DOI: 10.3905/jwm.2020.1.124

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Risk Tolerance, Return Expectations and Other Factors Impacting Investment Decisions
Sam Sivarajan, Oscar De Bruijn
The Journal of Wealth Management Nov 2020, jwm.2020.1.124; DOI: 10.3905/jwm.2020.1.124
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  • Article
    • Abstract
    • THE USE AND MISUSE OF RISK TOLERANCE QUESTIONNAIRES
    • RESEARCH DESIGN AND METHODOLOGY
    • RISK TOLERANCE DOES NOT PREDICT RISK-TAKING
    • RETURN EXPECTATIONS PREDICT RISK-TAKING
    • DEMOGRAPHIC FACTORS
    • PERSONALITY TRAITS
    • INVESTMENT LITERACY
    • EXPERIENTIAL LEARNING AND MEMORY
    • OTHER THEMES FOR INVESTMENT DECISIONS
    • A FRAMEWORK FOR UNDERSTANDING INVESTMENT DECISIONS
    • LIMITATIONS OF THIS RESEARCH
    • IMPLICATIONS FOR STAKEHOLDERS
    • CONCLUSIONS
    • APPENDIX 1
    • ENDNOTES
    • REFERENCES
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  • PDF (Subscribers Only)

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