The impact of investor socioeconomic characteristics on risk and return preferences

Abstract

The balancing of risk and return represents the classic investor dilemma. In theory, an investor seeks to maximize overall rate of return consistent with a desirable risk level. In practice, investor personal and financial characteristics may influence their risk/return preferences. Investors with similar socioeconomic characteristics tend to have similar risk/return preferences. That is, investors differ significantly in such factors as objectives, tastes, and needs, but most of the these differences may be explained by levels of risk and return investors feel appropriate.There has not been great deal of empiricism on the positive aspects of investor behavior. The purpose of this study is to provide some empirical evidence on the relationships, if any, of selected socioeconomic characteristics with the importance individual investors actually assign to the risk/return characteristics of common stock. Specifically, the relationships between each of eight socioeconomic characteristics and five risk and return preference variables.The findings of this study suggest that some socioeconomic characteristics have a greater impact on investor common stock risk and return preferences than do others. When viewed in terms of the number of significant relationships found, the most important socioeconomic characteristic investigated is age, followed by sex, decision orientation, marital status, education, and income.Because of the limited nature of the sample and the fact that some of the findings are inconsistent with previous observations and tests, additional research is needed to generalize the findings. Nonetheless, the findings strongly suggest that individual investor risk/return preferences for common stock reflect their socioeconomic characteristics.