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Can portfolio risk be described with estimates of financial risk tolerance calibration?

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  • Rabbani, Abed G.
  • Grable, John E.

Abstract

The purpose of the study was to analyze the degree to which categories of financial risk-tolerance miscalibration are associated with portfolio choices made by financial decision-makers. A differential prediction model was applied to investment risk tolerance data from 2017 to 2018 to assess the presence of miscalibration. Results from Tobit regressions showed that some survey respondents did engage in the miscalibration of their financial risk tolerance. Although results varied by sub-samples, those who systematically under-estimated their financial risk tolerance were observed to hold portfolios that were less risky than those who were able to match their self-assessed risk tolerance to their psychometrically reliable score. No clear pattern of portfolio choice for those who over-estimated their financial risk tolerance was noted. Being female and between the age of 55 to 64, having an income of $100,000 or more, and working with a financial advisor were found to be more consistent descriptors of portfolio risk compared to risk-tolerance miscalibration.

Suggested Citation

  • Rabbani, Abed G. & Grable, John E., 2022. "Can portfolio risk be described with estimates of financial risk tolerance calibration?," Finance Research Letters, Elsevier, vol. 46(PB).
    • Handle: RePEc:eee:finlet:v:46:y:2022:i:pb:s1544612321004682
    DOI: 10.1016/j.frl.2021.102492
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    References listed on IDEAS

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    1. Grable, John & Lytton, Ruth H., 1999. "Financial risk tolerance revisited: the development of a risk assessment instrument," Financial Services Review, Elsevier, vol. 8(3), pages 163-181.
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    3. Grable, John E. & Lyons, Angela C. & Heo, Wookjae, 2019. "A test of traditional and psychometric relative risk tolerance measures on household financial risk taking," Finance Research Letters, Elsevier, vol. 30(C), pages 8-13.
    4. Broihanne, M.H. & Merli, M. & Roger, P., 2014. "Overconfidence, risk perception and the risk-taking behavior of finance professionals," Finance Research Letters, Elsevier, vol. 11(2), pages 64-73.
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    Cited by:

    1. Kong, Hyeongwoo & Yun, Wonje & Kim, Woo Chang, 2023. "Tracking customer risk aversion," Finance Research Letters, Elsevier, vol. 54(C).

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    More about this item

    Keywords

    Differential prediction; Estimation error; Portfolio risk; Risk tolerance;
    All these keywords.

    JEL classification:

    • C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models; Threshold Regression Models
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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