The demographic attributes of an individual

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The effect of an individuals gender and family income have been considered to be determinants of their risk tolerance or attitude towards risk, which in turn has been hypothesized to affect the nature of their investment decisions. Embrey and Fox in their paper Gender Differences in Investment Decision-Making Process (2002) propose that women and men are influenced by different factors to hold more risky assets. Women have been shown to be less risk averse than men (Eckel and Grossman,2003). Individual investment choices have been linked to demographic attributes of the investors (Warren et al., 1990 and Rajarajan, 2002).

The dependence of investment decision on risk tolerance of the investor has been explored and investigated widely. The formulation of Risk Tolerance Questionnaires to assess the level of an individuals risk tolerance deserves mention in this regard. James E. Corter and Yuh-Jia Chens work Do Investment Risk Tolerance Attitudes predict portfolio risk? concluded that investors with higher tolerance of risk may actually have higher-risk portfolios.

The variability of returns on an individuals portfolio, captured through the factor beta is widely regarded as a measure of the riskiness of a portfolio. This measure has been used in this study to gauge the riskiness of an investors portfolio. Besides this measure, the tendency of an investor to distribute his portfolio between Large Cap, Mid Cap and Small Cap stocks when stocks of all three kinds are available for portfolio formation has been used as another indicator to measure the individuals risk tolerance as displayed in his/her investment decisions. Rather than look at the individuals choice of including bonds, stocks, real estate and other avenues of investment to whet his risk appetite appropriately, it has been felt that given a range of only stocks providing enough option to choose from in order to be able to form a portfolio with varying degrees of risks an equally effective tool to reflect the investors investment decisions on a whole.

The present tries to establish how the gender and family income of individuals play a role in determining their risk tolerance which, in turn, is reflected in their investment decision as is captured in the portfolio they fabricate from a sufficiently high range of stocks spanning a wide continuum of beta as well as belonging to all three categories viz. Large Cap, Mid Cap and Small Cap.

Theoretical Background and Hypotheses:

Gender on Risk Appetite:

Studies have focused on the differences in risk tolerance between the genders. Women are considered to be more risk averse in situations similar to gamble (Hershey and Schoemaker, 1980). Women tend to choose less risky bets in experimental market conditions which involve lotteries and auctions (Harlow and Keith, 1990). Another study (Hudgen and Fatkin, 1985) suggests that both genders are equally successful in decision-making under conditions of risk.

Another study (Powell and Ansic, 1997) said that women are lesser risk seeking than their men irrespective of framing and familiarity, ambiguity or costs. Brynes and Miller in 1999 investigated the relation between gender and risk and came to the conclusion that females take less risk than males. In case of married couples, wives tend to take lesser risks than husbands (Hanna and Lindamood, 2005).

Family Income on Risk Appetite:

Income also affects the risk tolerance levels of persons. Relative risk aversion of persons reduces as the income level rises and for high income individuals, it reduces significantly (Riley and Chow, 1992). Riley and Chow also noted that risk aversion reduces with increase in education but speculate that education, wealth and income are highly correlated, so the relation may be due to wealth rather than education. Moreover, in the early version of Bernoullis expected utility theory, the differences in risk tolerance are attributed to differences in wealth of investors, with more risk being taken by wealthier individuals.

Risk Tolerance on Portfolio Risk:

The risk tolerance level of an individual affects the kind of portfolio he invests in. A study (Corter and Chen, 2005) used a new instrument to evaluate investment risk tolerance called the Risk Tolerance Questionnaire (RTQ). It concluded that investors who have a high risk tolerance score have portfolios of high risk. The modern portfolio theory says that optimal allocation of assets in an investment portfolio must take care of the tradeoff existing between expected risk and return and believes that investors have certain risk preferences that influence the optimization (Yook and Everett, 2003). Langer (1975) concludes in his study that self-reported risk tolerance level best explains the differences in both portfolio diversification and turnover across various investors.

Gender on Portfolio Risk:

Studies have investigated the relation between gender and risky investment decisions. Women are found to take less risk than men while making the most recent and largest decision for mutual funds investments (Dwyer and others, 2002). The study also found that the effect of gender on risk taking becomes significantly weak when investor knowledge and investments are controlled in regression. This outcome shows that higher risk aversion among women can be substantially, but not fully, explained by knowledge differences. Bernasek and others in 1998 found that females show greater risk aversion than males while allocating wealth in contribution pension assets. Females have significantly lower confidence level than males while investing after other relevant variables are controlled (Estes and Hosseini, 2001). Another study investigated that females are more risk averse than their male counterparts in gambles, investment frames with a possibility of loss and gamble frame without any loss (Eckel and Grossman, 2003). A study by Schubert in 2006 looks at decisions trees to identify whether gender differences in risk analysis and management actually exist. Another study by Helga et al. in 2006 tries to examine whether the perception that women are more risk averse than men in matters of financial decision making is true.

Family Income on Portfolio Risk:

Individual choices of investments like stocks, bonds, real estate etc. depend on lifestyle and demographic attributes which include income (Warren et al., 1990 and Rajarajan, 2000). The investors look at rewards subject to their own behavior (Rajarajan, 2002).

Gender, Income and Risk Tolerance on Portfolio Risk:

There have also been studies which investigate the effects of demographics like gender, income etc. and personality type on investment choices. A study by Meenu Verma in 2008, conducted though a survey in Jaipur, says that demographic variables like gender, age, income, education, occupation and personality types such as conservative, medium conservative, moderate, medium aggressive and aggressive, based on the risk taking ability of the individual affect the choices of investments made by individuals. The study investigates the separate effect of demographics and personality on portfolio of investments as well as their combined effect on the investment decisions.

Effect of Investment Experience (moderating variable) on Risk Tolerance & Portfolio Risk:

The number of years a person has been investing in the past also affects his risk tolerance and the kind of investment portfolio he chooses. People with higher investment experience were more risk-tolerant and chose portfolios with higher risk than those who were less experienced (Corter and Chen, 2005).

There are certain gaps in the existing literature. Existing literature does not contain the effects of the demographic factors and risk-taking ability/personality type on the kind of stocks an individual would like to hold as part of his equity portfolio. Also there has been no separate analysis for Large Cap, Mid Cap and Small Cap cos done in the past

The following hypothesis are to be validated :

  • Gender has a significant effect on Portfolio Risk, which is mediated by Risk Tolerance.
  • Gender has a significant effect on Portfolio Risk of Large Cap Stocks, which is mediated by Risk Tolerance.
  • Gender has a significant effect on Portfolio Risk of Medium Cap Stocks, which is mediated by Risk Tolerance.
  • Gender has a significant effect on Portfolio Risk of Small Cap Stocks, which is mediated by Risk Tolerance.
  • Family Income is positively related with Portfolio Risk, which is mediated by Risk Tolerance.
  • Family Income is positively related with Portfolio Risk of Large Cap Stocks, which is mediated by Risk Tolerance.
  • Family Income is positively related with Portfolio Risk of Medium Cap Stocks, which is mediated by Risk Tolerance.
  • Family Income is positively related with Portfolio Risk of Small Cap Stocks, which is mediated by Risk Tolerance.



The Survey was floated on the internet and respondents were contacted using e-mail and social networking websites. A total of around 250 people were contacted out of which 138 chose to participate. The questionnaire didnt contain any identifier. Most of the respondents were pursuing PGDBM from XLRI Jamshedpur and had enough knowledge on the subject of finance. Also, the age group of the sample was 20-25 years.


The following constructs and variables were used in our analysis:

Theoretical Model:

Gender: The respondents were simply asked to disclose their gender in the questionnaire.

Family Income: The respondents were asked to specify the range in which their total family income belonged, the ranges given to them were below 5 lakhs, between 5-10 lakhs, between 10-15 lakhs, between 15-20 lakhs and above 20 lakhs. Since the respondents in the last two categories were low compared to others, these two ranges were collapsed to form a single range of above 15 lakhs for the purpose of analysis.

Investment Experience: The respondents were asked to mention the number of years since they have been investing. They were again given five ranges - 0-1, 1-2, 2-3, 3-5 and over 5 years. Again since the most of the responses were in the 0-1 range, rest of them were collapsed into a single range of over 1 year of experience.

Risk Tolerance: Risk tolerance of a respondent was measured through a standard Risk Tolerance Questionnaire (RTQ) developed by a financial advisory firm Partnervest. The questionnaire has 10 questions and gives a score between 8 and 34. Higher the score of a respondent in this questionnaire, greater his risk tolerance or risk taking ability.

Equity Portfolio Risk: In order to capture the risk associated with an individuals equity portfolio, we selected 30 stocks and asked our respondents to allocate money to those stocks according to their investing habits. Respondents could allocate between 0, 5000, 10000, 20000, 50000 or 1 lakh rupees to every stock based on their choice. They were provided with data on each stocks Market cap, beta, Sector, P/E (Price/ Earnings ratio) and P/BV (Price/Book Value ratio), in order to help them make an informed decision.

According to the Capital Asset Pricing Model (CAPM), the risk of a portfolio can be captured by the beta of the portfolio which measures its systematic risk i.e. the risk which is due to industry or economy related factors (Ardalan, 2000 and Theobald, 1979). The model further argues that an investor can reduce his/her unsystematic risk i.e. the risk associated to a stock because of company specific factors, by investing in a portfolio of stocks such that positive news for some stocks offset the negative news on others. Since the investor can reduce this unsystematic risk to almost nil just by investing in a portfolio of stocks, he should not demand any extra return for taking this company or stock specific risk.

Liming Guan et al in their study reexamined the research that beta as specified by the CAPM Model explains cross sectional variation in stock returns i.e. risk associated with a stock by employing more rigorous statistical methods than used in the past. The findings show that beta is a significant variable to measure the risk of securities.

In researches done earlier (Corter and Chen,2006), Portfolio risk is captured by first assigning a weight proportional to the riskiness of an asset class, then measuring the portfolio risk by multiplying this risk weighting of each class by the percentage of assets invested by the individual in that class and summing over all the classes to get,

PR = ?ripi


PR = Overall portfolio risk score.

ri = Risk weighting of the asset class.

pi = Percentage of the individuals assets invested in that asset class.

A similar measure to score individual portfolio risk was also used by Morse (1998) in the past. Since, in this research risk of only equity portfolio is considered which is measured by beta, we have used the same formula for calculating the risk associated with an individuals equity portfolio by replacing by replacing ri with beta .

PR = ?pi

Stocks were selected based on quota sampling in which 10 stocks each were selected in three different ranges of market capitalizations:

  1. Large Caps : Ranging from a Market Cap of 40,000 crore to more than 3 lakh crore rupees.
  2. Mid Caps : Ranging from a Market cap of 3000 crore rupees to 25000 crore rupees.
  3. Small Caps: Ranging from Market cap of 100 crore rupees to 2500 crore rupees.

Within each range of Market Capitalization, a maximum of 1 company was selected from a sector. The selection of sectors and the company within a sector was done at discretion keeping in mind, the variety in beta and the general awareness about the company. Every effort was made to give as wide range of stocks as possible to the respondent. This was done also to ensure that we get a variety of portfolio betas and are able to capture risk of an individuals equity portfolio effectively. The stocks selected for the purpose are as follows:


In the questionnaire, the position of these stocks was randomized so that the respondents cannot identify the categories in which these stocks were divided and can give an unbiased response. It was all the more important because a large portion of our sample population was a student of finance.


Limitations of Research:

The research had a number of limitations which affected the results of the research. The convenient sample population in the research consisted mainly of MBA students most of whom belonged to XLRI, Jamshedpur. A large population of the sample population had no prior experience in investing and their knowledge of different financial parameters as Beta, P/E Ratio, P/BV Ratio was derived from the theoretical courses undertaken. It is not improbable that the views of the instructors of these courses regarding stocks and the capital market could have influenced the respondents which in turn had influenced the results of the study. The sample population constituted mainly of individuals belonging to the age group 21-30 and most of them were MBA students. Thus the study did not capture the stated relationships for investors spanning across different age groups and having different education levels.

It was observed that on some occasions the members of the sample population filled up the survey within a very short period of time. This indicated that the sample responses might have lacked proper thought and prudence which was required. It can be stated that in reality an investor would do a detailed analysis before actually allocating in an equity portfolio.

The study was cross sectional in nature. However it could have been influenced by the capital market conditions of India, the country in which the study was performed, at that point in time. A longitudinal study performed over a period of time could have been a more preferred mechanism.

Of the total number of respondents approximately only 25% of the respondents were female respondents. This could have influenced the results and a much more balanced sample population is desirable.

Thus the results of this study may not be generalized and applicable to all investors. In future studies a longitudinal study on a much more diverse sample population (in terms of financial knowledge, investing history, gender, age, education level) is desirable.

Originality Value:

The research was aimed at studying the given relationships with the focus as the equity market. In the past, studies aimed to find out the effect of risk propensity on investing decisions did not consider only the equity market, other investment options as real estate, investing in the bond market were also taken into consideration.

Another feature which is the novelty of this study is the division of the equity market into small cap, mid cap and large cap markets and studying the given relationships for these individual markets.

Discussion and Implications:


Risk tolerance does not acts as a mediator between gender, family income and the individuals equity portfolio risk. There may be some other variables influencing the affect of these two predictor variables on the dependent variable. Such variables can include education loan, future expenses, accumulated wealth etc. Further research needs to be done after controlling the effect of these variables.


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Risk Tolerance Questionnaire. Link: