Practical Applications of Risk Tolerance, Return Expectations, and Other Factors Impacting Investment Decisions

Abstract

In <b><i>Risk Tolerance, Return Expectations, and Other Factors Impacting Investment Decisions</i></b>, from the Spring 2021 issue of <b><i>The Journal of Wealth Management</i></b>, authors <b>Sam Sivarajan</b> and <b>Oscar De Bruijn</b> of <b>Alliance Manchester Business School</b> seek to determine how to ensure greater fidelity between an investor’s true risk appetite and the portfolio selected by an advisor. To do so, they first assess whether using a risk tolerance questionnaire, a common method, can accurately predict investor behavior. They review alternative variables and their relationship to an investor’s individual risk appetite by surveying and interviewing investors and advisors. After aggregating and analyzing the data, the authors determine that risk tolerance questionnaires typically are not valuable in predicting investor risk-taking behavior. However, certain factors, including demographic data, return expectations, and investment experience, were effective predictors of such behavior. The authors used these findings to develop a framework designed to assist investors and their advisors in selecting a portfolio that is aligned with an investor’s personal risk tolerance and goals.