AN EMPIRICAL INVESTIGATION OF THE RELATION BETWEEN RISK TOLERANCE AND SOCIOECONOMIC

CHARACTERISTICS OF INDIVIDUAL INVESTORS

Prepared by: JAYESH SOLANKI From: QUEST MAGAZINE Vol. 1 , Issue 1, AUGUST,2011

ABSTRACT

The Research concludes that investors socioeconomic characteristics such as Marital status, Earnings, Occupation and No. of Dependents on Risk tolerance. But Educational level, Regularity of investment decision are independent of risk tolerance level of the Indian individuals investor.

OBJECTIVES OF THE STUDY

(1) To know the risk tolerance level of the individual investor and classify them into Low, Medium and High risk tolerance level.

(2) To investigate relationship between the socioeconomic factor (Marital status, Educational level, Occupation, Earning, Number of dependents) of the investors and risk tolerance level.

(3) To identify the socioeconomic factors on which risk tolerance level of the investor is dependent.

METHODOLOGY

There are two common methods of estimating investors tolerance for risk.

The first method is a clear understanding of the investors and his\her history with investment securities.

The second method is to use a Questionnaire. Sample size is 150 investors.

CONTINUES

Based on the responses to the questionnaire, For measuring the risk tolerance cumulative scale has been used. level

To study the relationship between risk tolerance level and socioeconomic factors(marital status, Education, Earning etc.) Chi-square test was applied. 5 % level of significance is considered while testing the hypothesis.

RESULTS AND DISCUSSION

RISK TOLERANCE LEVEL Marital status Unmarried Married

LOW MEDIUM HIGH TOTAL

PRECENTA GE

P-VALUE

06 55

05 31

19 42

30 120

20.00% 80.00%

0.023

Education Under-graduate Graduate Post Graduate & above 04 31 26 05 13 20 06 21 24 15 65 70 10.00% 43.3% 46.7% 0.919

Occupation Accounting & Finance Professional Self employed 32 14 15 08 22 08 25 22 04 65 58 27 43.3% 38.7% 18.00% 0.014

RISK TOLERANCE LEVEL Earning/annual < 1,50,000 1,50,000 to 2,50,00 > 2,50,000 No.of Dependents Only- yourself 1 to 3 persons besides yourself 4 to 5 persons besides yourself More than 5 persons besides yourself Risk tolerance level Percentage

LOW

MEDIU HIGH M

TOTAL

PRECENTA P-VALUE GE

01 16 44

00 20 18

02 09 40

03 45 102

02.00% 30.00% 68.00%

0.020

04 27 26 04

04 16 08 10

10 26 15 00

18 69 49 14

12.00% 46.00% 32.7% 09.3% 0.0196

61 40.7%

38 25.3%

51 34%

150 100%

From the previous table, We can say that,

From the Sample of 150 individual investors,

(1) It has been found that 61 investors (40.7%) have low risk tolerance. (2) 38 investors (25.3%) have moderate risk tolerance. (3) 51 investors (34%) have high risk tolerance.

HYPOTHESIS

H01 : investors marital status does not play significant role in determining investor risk tolerance. The marital status of 80% of the investors was found to be married and the rest 20% are unmarried. Its interesting to know that 55 (36.7%) married investors are low risk tolerant as compared to high risk tolerance were only 42 (28%). Hence H01 is Rejected.

H02 : investors education and risk tolerance level are independent. From, the education perspective,

70(46.7%) of the individual investors covered in the study are Postgraduate, 65(43.3%) investors are Graduates 15 (10%) of the investors under-Graduates.

To conclude the H02 investor's education and risk tolerance are independent.

 H03

: There is no significant difference between the risk tolerance of investor in different occupations. occupations perspectives,

From

65

(43.3%) of the investors are related with finance, accountancy, investment, banking, broking and financial management 58 (38.7%) of the investors are related with software engineers, medical practitioner, teachers etc. 27 (18%) is related with non-accounting or nonfinancial occupations.

Thats way Ho3 is tested. Find that it is related It is significant to the risk tolerance level.

H03 is accepted

H04 : Investors earnings do not play significant role in determining investor risk tolerance. The survey finds that 102 (68%) of individual investors whose earning above Rs. 2,50,000p.a. The p-value was found to be 0.020057. Hence, H04 is not accepted.

To concluded that investors earning do play significant role in determining investor risk tolerance.

H05 : Number dependents investor is responsible and the risk tolerance level is independent. In the survey finds that, only 12% of the investors do not have dependents 64% of the individual investors are responsible for one to three persons beside self, H05 is not accepted and conclude that Number of dependents investor has and the risk tolerance level are dependent.

FINDINGS
(1) Indian individual investors are either low risk tolerant or high risk tolerant but not moderate risk tolerant. (2) Investors risk tolerance level is dependent on the marital status. (3) Investors education does not play significant role in determining investors risk tolerance level.

CONTINUED..
(4) investors occupation play significant role in determining investors risk tolerance. (5) Individual investors earnings do play a significant role in determining investor risk tolerance. (6) Number of dependents investor has and the risk tolerance level is dependent.

SUMMARY AND CONCLUSION

The aim of this paper is to investigate the relationship between socioeconomic factors and financial risk tolerance of individual investors. The empirical study concludes that Indian investors are conservative investors since 41% of the investors are low risk tolerant or aggressive investors since 34% are high risk tolerant. The empirical analysis has important implications for investment managers as it has come out with certain interesting facets of individual investors.

CONTINUED..

The investors product designers can design products, which can cater to the investors with varying risk tolerance level among the Indian individual Investors.