Two Measures of Financial Risk Tolerance from Questionnaire Data

14 Pages Posted: 13 May 2018

See all articles by Ryan Gard

Ryan Gard

Pivot Point Advisors

Martin Gremm

Pivot Point Advisors

Date Written: May 1, 2018

Abstract

Set-based principal component analysis extracts two independent measures of financial risk tolerance from questionnaire responses. These measures are less noisy than most scoring methods. They are also more robust because they provide a redundant assessment of financial risk tolerance. This analysis reveals that typical risk questionnaires measure financial risk tolerance and income-related risk tolerance. These two factors are unrelated, which suggests that income-related questions should be dropped from financial risk questionnaires. We also examine how financial risk tolerance depends on financial literacy and gender.

Keywords: Investment Risk, Questionnaire, Risk Tolerance, Risk Aversion, Gender, Financial Literacy

JEL Classification: D14, D12

Suggested Citation

Gard, Ryan and Gremm, Martin, Two Measures of Financial Risk Tolerance from Questionnaire Data (May 1, 2018). Available at SSRN: https://ssrn.com/abstract=3171820 or http://dx.doi.org/10.2139/ssrn.3171820

Ryan Gard

Pivot Point Advisors ( email )

Bellaire, TX 77401
United States

Martin Gremm (Contact Author)

Pivot Point Advisors ( email )

Bellaire, TX 77401
United States

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