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Assessing Financial Risk Tolerance Of Portfolio Investors Using Data Envelopment Analysis

Author

Listed:
  • PARISA HOSSEINI ARDEHALI

    (Department of Mechanical and Industrial Engineering, University of Toronto, 200 College Street, Toronto, ON M5S 3E5, Canada)

  • JOSEPH C. PARADI

    (Centre for Management of Technology and Entrepreneurship, Department of Chemical Engineering and Applied Chemistry, University of Toronto, 200 College Street, Toronto, ON M5S 3E5, Canada)

  • METTE ASMILD

    (Nottingham University Business School, Jubilee Campus, Wollaton Road, Nottingham NG8 1BB, United Kingdom)

Abstract

For some investors their own personal investment counsellors address their investment strategy; for others automated means are used. To protect investors, the Canadian Government has enacted the "Know Your Client" Act requiring that all investment dealers and vendors of securities must know their clients and advise them on the appropriate investment strategy. This paper uses Data Envelopment Analysis (DEA) in a novel manner by applying it to a large data set of answers to a number of psychological questions. A Slacks Based Model was used to estimate investor risk tolerance. The model analyses the risk profile of the investor and can be used as a guide to match the risk rating of the investment vehicles for the client. Statistical comparisons were also carried out to show how risk tolerance relates to various demographic variables. Finally, the DEA results were validated through comparisons with the commercial system already in use.

Suggested Citation

  • Parisa Hosseini Ardehali & Joseph C. Paradi & Mette Asmild, 2005. "Assessing Financial Risk Tolerance Of Portfolio Investors Using Data Envelopment Analysis," International Journal of Information Technology & Decision Making (IJITDM), World Scientific Publishing Co. Pte. Ltd., vol. 4(03), pages 491-519.
    • Handle: RePEc:wsi:ijitdm:v:04:y:2005:i:03:n:s0219622005001660
    DOI: 10.1142/S0219622005001660
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    Citations

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    Cited by:

    1. Avkiran, Necmi K. & Parker, Barnett R., 2010. "Pushing the DEA research envelope," Socio-Economic Planning Sciences, Elsevier, vol. 44(1), pages 1-7, March.
    2. Liana Holanda N. Nobre & John E. Grable & Wesley Vieira da Silva & Claudimar Pereira da Veiga, 2016. "A Cross Cultural Test of Financial Risk Tolerance Attitudes: Brazilian and American Similarities and Differences," International Journal of Economics and Financial Issues, Econjournals, vol. 6(1), pages 314-322.
    3. Zandri Dickason-Koekemoer & Suné Ferreira, 2018. "Subjective Risk Tolerance of South African Investors," Journal of Economics and Behavioral Studies, AMH International, vol. 10(6), pages 286-294.
    4. Naveed Hussain Shah & Waqar Khalid & Saifullah Khan & Muhammad Arif & Muhammad Asad Khan, 2020. "An Empirical Analysis of Financial Risk Tolerance and Demographic Factors of Business Graduates in Pakistan," International Journal of Economics and Financial Issues, Econjournals, vol. 10(4), pages 220-234.
    5. M Kannadhasan & S Aramvalarthan & S K Mitra & Vinay Goyal, 2016. "Relationship between Biopsychosocial Factors and Financial Risk Tolerance: An Empirical Study," Vikalpa: The Journal for Decision Makers, , vol. 41(2), pages 117-131, June.
    6. Cooper, W.W. & Kingyens, Angela T. & Paradi, Joseph C., 2014. "Two-stage financial risk tolerance assessment using data envelopment analysis," European Journal of Operational Research, Elsevier, vol. 233(1), pages 273-280.
    7. Sune Ferreira & Zandri Dickason-Koekemoer, 2019. "The Relationship Between Depositor Behaviour and Risk Tolerance in a South African Context," Advances in Decision Sciences, Asia University, Taiwan, vol. 23(3), pages 36-55, September.
    8. Tanuj Nandan & Kumar Saurabh, 2016. "Big-five personality traits, financial risk attitude and investment intentions: study on Generation Y," International Journal of Business Forecasting and Marketing Intelligence, Inderscience Enterprises Ltd, vol. 2(2), pages 128-150.
    9. Zandri Koekemoer, 2019. "The influence of the level of education on investors risk tolerance level," Proceedings of Economics and Finance Conferences 9511449, International Institute of Social and Economic Sciences.

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