Quantification of Risk Appetite for Young Professionals: An Empirical Study

Abstract

The debate over quantification of risk appetite of investor keeps evolving. As the modern portfolio theory gained prominence, the area has grabbed researchers interest world over resulting into many significant contributions made so far. However, this area needs exploration in Indian context to add to the existing body of knowledge. This paper is an attempt to contribute in this direction by developing the instrument for quantification of risk appetite. The final outcome of the study is a questionnaire with twelve items and four factors; 1. Psychological Perspective, 2.Financial Stability Perspective, 3.Societal Perspective, 4.Tendency to Panic. The researchers used Factor Analysis (EFA) to surface dominant factors attributable to quantification of risk appetite. The methodological framework included identification of factors by using anti-image correlations and Varimax Rotated Component Matrix. The sample of 160 young professionals from Rajkot and Ahmedabad were found adequate as per Kaiser-Meyer-Olkin Measure of Sampling Adequacy. As the study pertains to quantification of complex behavioral aspect, Chronbachs Alpha of fifty percent was considered satisfactory. The researchers believe that the study will predominantly facilitate Portfolio Management Services (PMS) to categorize investors based on their risk appetite. This would also be of relevance for Asset Management Companies (AMCs) to structure the schemes according to the risk profile of the investors.

Keywords: Portfolio Management Services, Risk Appetite, Behavioral Finance, Quantification of Risk, Attributes.

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