INVESTOR PROFILING THROUGH

ESTIMATED RISK TOLERANCE

LEVELS

SUBMITTED TO

PROF. SAPTARISHI PURKAYASTHA N. NISHCHALA SRIPATHI

FACULTY, IBS HYDERABAD ASSISTANT MANAGER, TATA AMC.

HYDERABAD

SUBMITTED BY

KARNA ABHITOSH SUMANKUMAR

09BSHYD0358

Page | 1
Table of Contents
1. Abstract ............................................................................................................................... 3
2. Introduction ........................................................................................................................ 3
3. Literature Review ............................................................................................................... 4
4. Hypothesis Rationale.......................................................................................................... 7
5. Data and Sample................................................................................................................. 8
6. Methodology ....................................................................................................................... 9
7. Data Analysis .................................................................................................................... 11
7.1 Sample Characteristics.................................................................................................. 11
7.2 Univariate Analysis ...................................................................................................... 12
7.3 Analysis of Covariance ................................................................................................. 13
7.4 Cluster Analysis ............................................................................................................ 14
8. Discussion and Conclusion .............................................................................................. 15
9. References ......................................................................................................................... 17
10. Annexure ......................................................................................................................... 19

Page | 2
 1. Abstract
This study presents evidence on the investors’ risk tolerance levels in the city of Hyderabad,
by using a questionnaire based survey method. The analysis indicates that men are more risk
tolerant than women and there is a tendency of an increase in risk averseness with an
increase in age. The analysis also indicates that there isn’t a very clear impact of the number
of dependents in the family on the risk tolerance of the investor, although the tolerance level
falls significantly if the number increases to four. There is also an indication that those
investors with higher income level appear to be more risk tolerant than otherwise. The most
important revelation in the study is related to the high risk tolerance observed in the young
migrant workforce present in Hyderabad, thus proving to be an attractive market segment
for Tata Mutual Fund.

2. Introduction
Mutual fund products can be differentiated on the basis of the risk attached to them. There
are products which can be classified as highly risky or moderately risky or having low risk.
But risk as a factor is always present in any financial product because the returns are
dependent on future market conditions, which can be volatile, and thus are difficult to
predict with accuracy.

It is also not easy to predict the risk tolerance of a potential investor. It has been found out in
past research work that risk is a factor which influences an individual’s decisions, including
financial and investments decisions (Lipe, 1998; and Yang and Qiu, 2005). Hence the link
between risk tolerance level and the choice for a particular financial or mutual fund product
is evident. The higher the risk tolerance of an individual, the higher financial risk he might
be willing to take. But the problem arises when a financial institution tries to estimate risk
tolerance levels in order to segment its existing and potential investors into a groups
showing similar behaviour. A situation can arise when the financial institution
underestimates or overestimates the risk taking ability of an investor and pushes a product
which is not suitable to that investor’s risk tolerance. Such mistakes might take a toll on the
relationship management of the financial institution and thereby impact its profitability and
business. On the other hand, if the institution is able to understand its investors’ risk
tolerance better, then it can offer the right products to the right segments and close the deal
with ease.

Page | 3
This study was conducted by using a questionnaire based survey method and it was held in
the city of Hyderabad, since its people are the potential investors for Tata Mutual Fund
branch of Hyderabad. The basic objective of this study is to quantify the risk tolerance levels
of individuals who are well versed with financial products and investments and to group
them into heterogeneous segments showing similar risk taking ability. The area of this study
comes under behavioural finance. Behavioural finance is a separate branch of finance which
focuses on the individual attributes, psychological or otherwise, that shape the common
investment decisions (Ritter, 2003).

Further, this study tries to understand the impact of various factors such as sex, age, marital
status, number of dependents, native region and annual income on the risk tolerance level of
investors and also to understand the extent of the impact. I have not come across any other
study being done in Hyderabad which tries to quantify risk tolerance among investors and
analyze the impact of the “native region” variable. The variable of native region was chosen
keeping in mind the large number of migrant workforce present in Hyderabad. Such a type
of differentiation on the basis of demographics is helpful in further understanding and
ascertaining the investment behaviour of the migrant as well as the native population, by
comparing them.

The other variables selected for the analysis are age, sex, marital status, number of
dependents and income. These have been chosen keeping in mind their assumed impact on
an individual’s financial decision making. A separate risk tolerance mean value for each and
every variable has been calculated for comparison and analysis.

The study finally concludes with suggestions of suitable Tata Mutual Fund products that
may be offered to an investor depending upon the segment he falls into.

3. Literature Review
Risk tolerance generally influences an investors’ decision to go or not to go for a particular
portfolio selection or for a particular stock or fund. But risk tolerance or the risk taking
appetite of an individual is not an easy thing to calculate. It is difficult to quantify such an
attitude which defines risk taking ability.

Hence, this very problem of calculating the risk tolerance level has attracted the attention of
many researchers, especially those belonging to developed western countries like the US,
where the financial system is comparatively well developed and the need to carry out such a
study was felt much earlier.

Although the core objective of my research project is to segment individuals into different
groups which have similar risk taking appetites but the first step to carry this forward was to

Page | 4
calculate the risk tolerance scores of each and every respondent I survey. I needed to review
prior work done in the same area to identify a feasible method to calculate the said risk
tolerance scores. Fortunately I have come across many research papers, most belonging to
authors from developed countries that have used questionnaire approach for calculating the
risk tolerance levels of respondents. Moreover, the papers also discuss about the impact of
different variables on the risk taking ability of individual investors; which incidentally is the
second objective of my project.

The most important paper I have referred to is by Jasim Y. Al-Ajmi (2008). The paper
presents new evidence on the determinants of risk tolerance of individual investors in
Bahrain. On the basis of an analysis of close to 1,500 respondents, the findings indicate that
as investors, men have high propensity towards risk tolerance than women. Investors with
better level of education and wealth are more likely to seek risk than less educated and less
wealthy ones. The study also reports that investors’ risk tolerance declines when they have
more financial commitments as well as when they are approaching towards their retirement
age or are retired. That is, the effect of investor’s age on risk tolerance is complex, in
contrast to results reported elsewhere. Bahrainis are also found to be less risk tolerant than
non-Bahrainis. One of the most important implications of the results is that the investment
industry should not treat investors as one homogeneous group; therefore, men and women as
investors should be treated as separate market niches, each with its own needs and requiring
targeted marketing strategies. Investment companies and financial service marketers should
design investment programs to respond to the particular needs of women investors, men
investors, investors with particular education and age levels, wealthy investors, and
expatriate investors. The paper has used the questionnaire developed by Dow Jones and
Company which is found in the book Investments (Bodie et al, 2007). I will be using the
same scoring methodology given as a part of the said questionnaire itself.

This research paper becomes highly relevant to my project since the study in the paper was
conducted in the country of Bahrain. Bahrain too is an emerging nation, going through a
development phase, hence has similar socio-economic conditions to those prevalent in India.

Some of the research papers carrying out a similar study have used the financial
questionnaire and methodology developed by ProQuest risk profiling system. Ulla Y. Yip
(November 2000) examines the robustness of financial risk tolerance as a psychological
trait. One hundred and twenty-nine finance students each managed a portfolio on an on-line
trading simulation for eight weeks. Financial risk tolerance was measured three times - pre,
post and follow-up - and was found to be stable. The increase in financial experience and
knowledge, as well as the occurrence of a major stock market crash during the trading
period did not appear to affect the stability of risk tolerance. Generally males were found to
be more risk tolerant than females, this was also reflected in their trading strategies.

Page | 5
However, this had no impact on their ability to obtain desired outcomes. It was concluded
that financial risk tolerance is better considered as a trait and not a state. Hence the paper
provides important insights about the psychological aspect of risk taking.

In the study carried out by Robert W. Faff, Terrance Hallahan and Michael D. McKenzie,
they analyze a large database of psychometrically derived financial risk tolerance scores
(RTS) and associated demographic information. They found that people’s self-assessed risk
tolerance generally accords with RTS. Further they found that gender, age, number of
dependents, marital status, income and wealth are significantly related to the RTS. Notably,
the relationship between age and risk tolerance exhibits a significant nonlinear structure in
their study.

In an interesting study carried out by researchers (Diane K. Schooley, Ph.D., CCM, and
Debra Drecnik Worden, Ph.D., September 2003) they focused on the generation X, those
born in 1964 through 1980 and have tried to understand their tolerance for risk. This study
explores Gen Xers' risk tolerance by evaluating their propensity for risk-taking, as well as
their attitude toward risk, their capacity for risk and their knowledge of risk. The results
from the study indicated that an evaluation of this generation's risk tolerance through the
four components of Cordell’s Risk PACK yields significant information for financial
planners. In terms of the percentage of financial assets allocated to equities, this generation
of investors in the Suri'cy of Consumer Finances exhibits a low propensity for risk taking,
relative to other generations. Their low propensity for risk taking is also consistent with their
perceived capacity for risk—evidenced by very short-term financial planning horizons and
with their phase in the life cycle. The study further states that what financial planners should
realize is that Generation X appears to lack financial knowledge. Gen Xers seem to lack a
clear understanding of the risk/return trade-off and the appropriate asset allocations required
to meet financial goals. While they claim to be concerned about the adequacy of their
retirement income, they are not deliberate in addressing this long-term goal. It is possible
that this disconnect between target planning horizon and savings goal is because Gen Xers
lack the discipline to defer consumption to save for retirement. The results of this study
cannot distinguish whether the dissonance between planning horizon and goals is due to lack
of financial knowledge or to a lack of discipline. But regardless of the explanation, an
educational opportunity for financial planners undoubtedly exists. Another relevant research
paper is by James E. Corter and Yuh-Jia Chen (2005) in which the authors investigate a new
instrument designed to assess investment risk tolerance, the Risk Tolerance Questionnaire
(RTQ). RTQ scores were positively correlated with scores on two other investment risk
measures, but were not correlated with a measure of sensation-seeking (Zuckerman, 1994),
suggesting that investment risk tolerance is not explainable by a general cross-domain
appetite for risk. Importantly, RTQ scores were positively correlated with the riskiness of
respondents’ actual investment portfolios, meaning that investors with high risk-tolerance

Page | 6
score tend to have higher-risk portfolios. Finally, respondents with relatively more
investment experience had more risk-tolerant responses and higher-risk portfolios than less
experienced investors.

But it was also important for me understand if the risk tolerance level of an individual
influences the level of risk he/she decides while making investments. Robert Masters (1989)
concludes in his paper that there between the risk-taking propensity and the level of risk
taken by an individual investor. The author found out the greater the investors knowledge
about investments, the greater the willingness to take risk. The study also indicates that
while gender has little influence on the risk taking, occupation and marital status do. Since
this paper states that there is in fact a relationship, hence I can move forward with my
project without having lingering doubts in my head regarding the relationship between risk
taking attitude and the actual investment decisions made by any investor.

The literature survey has been of great help for me, especially by searching the questionnaire
and the risk scoring methodology (Jasim Y. Al-Ajmi, 2008). It has helped me to move ahead
in the project after sorting out one of the biggest challenges of quantifying the degree of risk
tolerance of any respondent. The project is different than the earlier work done since it
basically tries to achieve the objective of segmenting individual investors on the basis of
certain easily identifiable variables. And the biggest point of difference is the socio cultural
and economic conditions prevalent in India. These factors could lead to a significant
difference in risk taking attitude of Indians (people from the city of Hyderabad) and those
belonging to the western countries where most of the earlier studies were conducted.

4. Hypothesis Rationale
A hypothesis has been formed to study that when only one variable among sex, age, marital
status, number of dependents, native region and income is allowed to vary then what is the
role played by the other constant variables in shaping the risk tolerance of the individual.
This hypothesis has been formed in order to check if the results of the univariate analysis
regarding the risk tolerance levels are robust or not.

The following are the hypothesis statements:

• Null Hypothesis: When only one variable among sex, age, marital status, number of
dependents, native region and income is allowed to vary there is no significant role
played by the other constant variables in influencing the risk tolerance.
• Alternate Hypothesis: When only one variable among sex, age, marital status,
number of dependents, native region and income is allowed to vary there is a

Page | 7
 significant role played by the other constant variables in influencing the risk
tolerance.

Earlier in the project I was inclined to test whether the independent variables I have chosen
have an influence on the risk tolerance. But the ample evidence reported in the past literature
regarding the influence of variables like sex, age, income, marital status already reports the
same. Hence, instead of testing the influence of the independent variables as a whole I have
tested them in order to see if they support the univariate results regarding risk tolerance. As I
mentioned earlier there is a lot of literature which suggests the influence of variables like
age, sex, marital status and wealth on the risk tolerance of an individual. In the United
States, Bruce and Johnson (1994) find that women take less investment risk. Jianakoplos and
Barnesek (1998) report results lend further support to the hypothesis that a far lower
percentage of women than men are willing to take any financial risk at all. Bajtelsmit and
Bernasek (1996) find sex as the third most important factor in determinants of investors’ risk
attitude. Lewellen et al. (1977) find that sex was the third most important determinant of
investor style (after age and income).

Age is found to be the most important determinant of investor style, Lewellen et al. (1977).
Many researchers support the notion that young people are less risk averse than elder people
in the same task context. As people get older, they rebalance their portfolios in favor of
fixed income securities at the expense of common stock [see Bodie et al. (1992), Bodie and
Crane (1997)] and Strong and Taylor (2001)].

As far as income is concerned Grable and Lytton (1999) find that wealth is one determinant
of investors’ risk attitude. Their results show that there is a positive risk seeking and wealth;
that is, wealthy investors are likely to hold a higher proportion of their portfolios in risky
assets. These results lend further support to the expected utility theory advanced by
Friedman (1974), Lewellen, Lease and Schlarbaum (1975), Blume (1978), Riley and Chow
(1992), Cohn, et al. (1996), Huang and Litzenberger (1988), and Bernheim et al. (2001).

Robert Masters (1989) concluded that marital status does have an influence on the risk
taking ability of the investors. “Number of dependents” and “native region” are the
variables which have not been tested or researched on a wide basis earlier but I still have
included them based on the context of my study.

5. Data and Sample

Primary data was collected for analysis in this study. The data has been collected in the form
of responses to the questionnaire from the people of Hyderabad. The sampling methodology
used is convenience sampling. The population of the study has been people who have prior

Page | 8
knowledge of making investments, and who are currently residing in Hyderabad. A sample
was selected from the population and a total of 234 respondents were interviewed, which
forms the sample size of the study. Normal distribution for the sample has been assumed.
Responses from the 234 questionnaires were coded and analyzed.

The city areas having a high number of migrant populations were visited to get the responses
from the migrant workforce. Retired and senior citizens were searched and approached in
their homes and in community centers.

In order to test the reliability of the questionnaire instrument the cronbach alpha was
calculated on the first 30 respondents and the result came out as 0.692 which was considered
as acceptable to move ahead with the survey. Later, I again calculated the cronbach alpha of
the responses of the total 234 respondents before running any test on the data. The result
came out as 0.736 which shows good internal consistency of the responses to the test
instrument and validates the use of the questionnaire.

6. Methodology

In order to quantify the qualitative aspect of the degree of risk tolerance a
questionnaire survey has been used (Jasim Y. Al-Ajmi, 2008).

Convenient sampling was used to collect the responses.

The questionnaire is divided into two segments; the first part includes questions to
ascertain the details such as age, income, marital status etc of the respondent.

The second part constitutes a risk quiz (part B in Appendix), which is being used to
assign risk-taking propensity scores to each of the respondents on the basis of their
answers to the questions.

The said questionnaire has been developed by Dow Jones and Company and found in
the book Investments (Bodie, Kane and Marcus, 2002). The risk quiz consists of
total 9 questions or cases in which respondents have to select one of three possible
answers.

Alternatives are weighted between 1 and 3. The degree of a respondent’s risk
aversion is calculated by adding the weights of the answers. The respondents scoring
between 9 and 14 points are assumed to be conservative investors. Those who score
between 15 and 21 points have been classified as moderate investors, and those who
score between 22 and 27 points have been classified as of having above-average risk
tolerance. This scoring methodology has being used in quantifying the hitherto
qualitative variable of risk-taking ability.

Page | 9

The questionnaire has been successfully tested for reliability and internal consistency
by using Cronbach alpha test in the SPSS 13.0 software before running any
statistical test on it. The result of the same is shown in data analysis section.

A descriptive analysis of the data has been run in the SPSS software to find out the
mean values of the risk scores for each category of independent variables like those
of men and women, those of married and unmarried etc.

Further, the analysis of covariance (ANCOVA) has been calculated as a part of the
regression analysis to test the robustness of the descriptive results and to find out the
impact or influence of constant independent variables on the dependent variable (risk
tolerance level) when only one variable among them is allowed to vary and others
are held constant.

Finally, a cluster analysis has been run on the collected data.

Page | 10
 7. Data Analysis
7.1 Sample Characteristics

Table 1: Descriptive summary of the sample characteristics

Variables Frequency Risk Tolerance

Sex
Male 140 1.84
Female 94 1.70
Age
18-28 58 2.05
29-30 55 1.87
40-50 47 1.68
51-61 38 1.71
62-73 27 1.52
74 and above 9 1.11
Marital Status
Married 184 1.70
Unmarried 50 2.08
Number of Dependents
0 73 1.82
1 66 1.76
2 65 1.80
3 24 1.83
4 6 1.17
Native Region
South India 89 1.74
Gujarat 37 1.89
North India 35 1.83
West India (excluding 26 1.77
Gujarat)
North East 21 1.67
East India (excluding North 26 1.81
East)
Annual Income (in INR)
0-2,49,9999 98 1.62
2,50,000- 4,99,999 88 1.83
5,00,000-7,49,999 30 2.07
7,50,000- 9,99,999 11 1.91
10,00,000- 12,49,999 4 2.25
12,50,000 and above 3 1.67

Page | 11
Table 1 gives the characteristics of the sample including the frequency of respondents and
mean risk score values of each and every variable. Further, I am reporting the results of
univariate analysis, analysis of covariance and cluster analysis.

7.2 Univariate analysis

The results in table 1 show that men are more risk tolerant than women. Although both the
average man (mean of 1.84) and woman (mean of 1.70) can be classified into as moderate
risk takers, yet there is a statistical difference between their mean risk tolerance scores. This
result is in agreement to several research studies done earlier.

Moving further it is observed that in general the risk tolerance is decreasing with an increase
in the age. There is a significant fall in the risk tolerance level when moving from the
younger to the older respondents. Respondents belonging to the youngest age bracket of 18-
28 years showed the highest risk tolerance (mean of 2.05) and in general the tolerance level
appears to have been reduced with increasing age. The reasons for low risk tolerance among
older respondents can be attributed to the shorter life period they are expecting to live. They
might not be willing to risk money for they also don’t expect to make up for possible losses
through long term future earnings. They also expect to have a shorter investment horizon in
sight so they might believe in short term fixed returns rather than long term returns which
are risky in nature.

It has been found out that married people (1.70) show less risk tolerance than unmarried
ones (2.08). It is not difficult to understand the reasons behind this as most of the unmarried
respondents are young, who have already showed a penchant for higher risk taking and
many of the married respondents belong to the higher age group brackets which have shown
a tendency for lesser risk tolerance.

The effect of number of dependents has not been very clear and straightforward. It has been
found out that the risk tolerance of those respondents having 2 dependents was more than
those having a single dependent. And further, the risk tolerance of those having 3
dependents was more than those having 2 of them. But it is also observed that when the
number of dependents reaches 4 there is a drastic fall in the risk tolerance level, thus
suggesting that increasing number of dependents has a significant effect on risk tolerance
after reaching a particular level. It can be said that with more number of dependents the
financial obligations of the investor increases, thus he might not be willing to risk his assets
as there are many dependents for him to take care of.

One of the most revealing and important results comes from the native region
differentiation. It has been found out that the migrant population in Hyderabad has shown a
high penchant for risk taking. With Gujaratis topping the list (mean of 1.89) and North

Page | 12
Indians coming second (mean of 1.83) the migrants have shown high risk taking
preferences. South Indians, who constitute the native population of Hyderabad showed
lower risk tolerance and are second last in the list (mean of 1.74). However it is seen that
migrants from North East have scored the lowest in terms of risk tolerance (mean of 1.67).
The reasons for the high risk tolerance among the migrant population can be that most of
them belong to the younger age groups and don’t have many dependents to take care of, they
also appeared to more knowledgeable about the financial products and markets. South
Indians might have shown lesser risk tolerance owing to the fact that many of the
respondents belonging to the older age groups were from the south, thus it might have pulled
down the mean risk value of the entire sample.

It was also observed that there is a general trend for people having higher income to score
more on risk tolerance. The reason can be that people with higher amount of disposable
income can feel more secured while making financial investments as possible losses due to
risk would also not affect the general living standard of the investor. And he might be able
to absorb the loss better than a person having low income.

7.3 Analysis of Covariance

I performed the general linear model of analysis of covariance in order to test the robustness
of the univariate results and also to know whether the results can be attributed to the
relationship between the independent variables. The test was performed six times. Each
time one determinant of risk (sex, age, marital status, no. of dependents, native region and
age) was considered as a fixed factor and the other determinants (independent variables)
were considered as covariates. The result of the test is shown in table 3.

Table 3: Summary results of Analysis of Covariance

Variables R Square F Statistics

Sex 28.6% 1.958*
Age 31.2% 5.469*
Marital Status 28.6% 0.691*
Number of Dependents 32.3% 4.108*
Native Region 29.1% 0.752*
Income 29.4% 3.998*
*Significant at less than 0.05 level

The results of analysis of covariance further lend support and validation to the univariate
results as it can be seen that when only one determinant of risk allowed to vary the other

Page | 13
determinants have a significant effect in determining the risk tolerance. Here we can see that
when sex is considered as a fixed factor and only it is allowed the other factors (covariates)
explain 28.6% of the change in risk tolerance.

Hence the results lend further support to the univariate results where it was found that men
are more risk tolerant than women. And that unmarried people are more risk tolerant than
the married ones etc.

The result also enables me to reject the null hypothesis that there is no dependence of the
independent variables like sex, age, marital status, number of dependents, native region and
income on the risk tolerance of the investors when only one among them is allowed to very
and other are kept constant. Because it is quite evident that all the variables or all the
determinants play a significant role in shaping the risk tolerance level of an investor.

7.4 Cluster analysis

I ran cluster analysis to find out the number of heterogeneous segments in the sample
showing similar characteristics and the also find the dominant factors of each of those
segments. I report the results of the cluster analysis and its interpretation.

After running hierarchical clustering on the data, it was found out that there are three
possible clusters emerging from the sample. Further, k-means clustering was run by
indicating the number of clusters as three and the following results were obtained.

Table 3: Final Cluster Centers

Cluster
1 2 3
Sex 1.48 1.44 1.32
Age 4.67 1.88 2.34
Marital Status 1.00 1.20 1.36
No. of dependents 1.97 2.41 2.29
Native region 1.42 4.79 1.76
Income 1.33 1.54 2.52
Risk score 1.47 1.74 2.01

Table 4: Number of Cases

Cluster 1 60.000
2 80.000
3 94.000
Valid 234.000
Missing .000

Page | 14
Table 4 indicates that among the three clusters the first cluster has 60 cases, second one has
80 and the third one has 94. Table 4 indicates that the dominating variable in the first cluster
is age (highest center value). The dominating variable in the second cluster is native region
and the variables of dominance in the third cluster are income and age (with the highest and
second highest values respectively).
These three clusters can be analyzed by focusing on the dominating variables thereof. The
three clusters can be classified as:

Investors close to retirement or those who are already retired (age): This cluster might be
majorly consisted of those investors who are close to retirement or are already retired and
who have very less risk tolerance compared to the younger age groups.

Migrant investors in Hyderabad (native region): This cluster might be majorly consisted of
the migrant investors residing in Hyderabad. These investors in general show high tolerance
for financial risk. They generally belong to the younger age groups.

Investors with good income but from young to middle aged groups (income and age):
This cluster might be majorly consisted of investors who earn medium to high level of
income but they are in the young to middle aged stages of their lives with many being
married and having dependents to take care of. Hence they show moderate level of risk
tolerance and form the major part of the entire sample.

8. Discussion and Conclusion

The purpose of this study was to quantify the qualitative aspect of risk tolerance and use this
quantification to segment potential investors into heterogeneous groups. Also, I wanted to
examine if the six determinant variables used in the study have an influence on the risk
tolerance of the investors, and to find out if there is a relationship among them (change this).
I used a questionnaire based survey method to collect the primary, used several statistical
procedures and also ran a cluster analysis to meet the objectives of my study. The results of
the entire study show that:
1. Male investors have higher risk tolerance than their female counterparts.
2. Young investors have higher risk tolerance than the older ones.
3. Married investors are more risk averse than unmarried ones.
4. There is significant fall in the risk tolerance of investors when their dependents
increase by a high number.
5. Young migrant workforce of Hyderabad shows a penchant for high risk tolerance.
6. Risk tolerance tends to increase with an increase in income.

When I analyze the clusters formed by the cluster analysis, the most important implication
of the results is regarding the high risk tolerance levels shown by the segment of young
migrant investors in Hyderabad. Most of this population works either in IT/ITES companies
or in the services sector and are in general earning medium levels of income. They appear to
be an attractive market segment to pitch equity related mutual fund products, which are

Page | 15
suitable to their risk taking appetite. Products like Tata Pure Equity fund, Tata P/E fund,
Tata Infrastructure fund and Tata Equity Opportunities fund can prove to be suitable for this
segment.
For the segment having many married and middle aged investors who generally have
dependents in their family and show a moderate level of risk appetite, funds like Tata Tax
Saving Fund (which provides tax benefits) and Tata Balanced Fund (which invests 35-45%
of its corpus in fixed return debt instruments) can prove to be the most suitable.
The segment consisting of mostly past investors who are either retired or are nearing
retirement, although not a very a promising market segment because of their low risk
tolerance levels, can still be turned into investors by offering them suitable low risk attached
products like Tata Monthly Income fund, Tata Liquid fund and Tata Floater fund which
have majority of investments in good quality debt instruments.

Page | 16
 10. References
1. Al Ajmi, J. Y., 2008. Risk Tolerance of Individual Investors in an Emerging Market.
International Research Journal of Finance and Economics, ISSN 1450-2887 Issue 17.
2. Schooley D K, Ph.D., CCM, and Worden D. D., September 2003. Ph.D., Generation
X: Understanding Their Risk Tolerance and Investment Behavior. Journal of
Financial Planning.
3. Corter J. E. and Chen Y. J., 2006. Do Investment Risk Tolerance Attitudes predict
Portfolio Risk?. Journal of Business and Psychology, Vol. 20, No. 3, Spring 2006.
4. Yip U. Y., November 2000. Financial Risk Tolerance: A state or a Trait. A thesis
submitted in partial fulfillment of the requirements for the degree of Master of
Psychology (Organisational) of The University of New South Wales.
5. Faff R. W. Hallahan T. and McKenzie M. D. An Empirical Investigation of
Personal Financial Risk Tolerance. Department of Accounting and Finance, Monash
University.
6. Bodie, Kane and Marcus, 2002. Investments. Tata Mc-Graw Hill publication. Fifth
edition.
7. Chronbach’s Alpha, available at http://en.wikipedia.org/wiki/Cronbach_alpha.
[Accessed 2nd April 2010]
8. Roszkowski M. J., Davey G., Grable J E., Questioning the Questionnaire Method:
Insights on Measuring Risk Tolerance from Psychology and Psychometrics.
9. FitzGerald V, April 2006, International Risk Tolerance, Capital Market Failure an
Capital Flows to Emerging Markets, Research Paper No. 2006/35. World institute
for development economics research.
10. Chronbach’s alpha with SPSS, available at
http://www.slideshare.net/ay17071951/data-analysis-with-spss-reliability-
presentation [Accessed 13 April, 2010 at 7.00 pm]
11. Jianakoplos, N. and Bernasek, A., 1998, Are women more risk averse?, Economic
Inquiry 36, 620-30.
12. Bajtelsmit, V. and Bernasek, A., 1996, Why do women invest differently than men?,
Financial Counseling and Investing 7,1-10.
13. Lewellen, W., Lease, R. and Schlarbaum, G., 1977, Patterns of investment strategy
and behavior among individual investors, Journal of Business, 50, 296-333.
14. Bodie, Z. and Crane, D.B., 1997, Personal investing: advice, theory and evidence,
Financial Analysts Journal 53, pp. 13–23.
15. Strong, N., and Taylor, N., 2001), Time diversification: empirical tests, Journal of
Business Finance and Accounting 28, 263–302.
16. Grable, J. E. and Lytton, R. H., 1999, Financial risk tolerance revisited: The
development of a risk assessment instrument,” Financial Services Review 8, 163-
181.

Page | 17
17. Friedman, B., 1974, Risk aversion and the consumer choice of health insurance
option, Review of Economics and Statistics 56, 209-214.
18. Lewellen, W., Lease, R. and Schlarbaum, G., 1977, Patterns of investment strategy
and behavior among individual investors, Journal of Business, 50, 296-333.
19. Blume, M., 1978, The changing role of the individual investor. New York: John
Wiley and Sons.
20. Riley, W. B., and Chow, K. V., 1992, Asset allocation and individual risk aversion,
Financial Analysts Journal., 32-37.
21. Cohn, R. A., Lewellen, W. G., Lease, R. C. and Schlarbaum, G. G., 1975, Individual
financial risk aversion and investment. portfolio composition, Journal of Finance 30,
605-620.
22. Huang, C. and Litzenberger, R. H., 1988, Foundation for financial economics, New
York: Elsevier Science Publishing Company.
23. Bernheim, B. D., Skinner, J. and Weinberg, S., 2001, What accounts for the variation
in retirement wealth among U.S. households. American Economic Review, 91, 832-
57.
24. Ritter, J. R., 2003, Behavioral Finance, Pacific-Basin Finance Journal 11, 429-437.

Page | 18
 11. Annexures

Cronbach’s alpha output

Pilot test:
Reliability Statistics

Cronbach's
Alpha N of Items
.697 9

On the entire sample:

Reliability Statistics

Cronbach's
Alpha N of Items
.736 9

Output of Analysis of Covariance:

Sex:
Tests of Between-Subjects Effects

Dependent Variable: Risk_score

Type III Sum
Source of Squares df Mean Square F Sig.
Corrected Model 18.436(a) 6 3.073 15.160 .000
Intercept 10.069 1 10.069 49.680 .000
Age 3.799 1 3.799 18.744 .000
Marital_Status .140 1 .140 .691 .407
No.of_dependents .581 1 .581 2.867 .092
Native_region .430 1 .430 2.123 .147
Income 3.564 1 3.564 17.583 .000
Sex .397 1 .397 1.958 .163
Error 46.009 227 .203
Total 804.000 234
Corrected Total 64.444 233
a R Squared = .286 (Adjusted R Squared = .267)

Page | 19
Age:
Tests of Between-Subjects Effects

Dependent Variable: Risk_score

Type III Sum
Source of Squares df Mean Square F Sig.
Corrected Model 20.077(a) 10 2.008 10.091 .000
Intercept 8.259 1 8.259 41.512 .000
Marital_Status .080 1 .080 .400 .528
No.of_dependents .165 1 .165 .828 .364
Native_region .481 1 .481 2.418 .121
Income 3.309 1 3.309 16.630 .000
Sex .224 1 .224 1.128 .289
Age 5.440 5 1.088 5.469 .000
Error 44.367 223 .199
Total 804.000 234
Corrected Total 64.444 233
a R Squared = .312 (Adjusted R Squared = .281)

Marital Status:

Tests of Between-Subjects Effects

Dependent Variable: Risk_score

Type III Sum
Source of Squares df Mean Square F Sig.
Corrected Model 18.436(a) 6 3.073 15.160 .000
Intercept 25.310 1 25.310 124.877 .000
No.of_dependents .581 1 .581 2.867 .092
Native_region .430 1 .430 2.123 .147
Income 3.564 1 3.564 17.583 .000
Sex .397 1 .397 1.958 .163
Age 3.799 1 3.799 18.744 .000
Marital_Status .140 1 .140 .691 .407
Error 46.009 227 .203
Total 804.000 234
Corrected Total 64.444 233
a R Squared = .286 (Adjusted R Squared = .267)

Page | 20
Number of Dependents:
Tests of Between-Subjects Effects

Dependent Variable: Risk_score

Type III Sum
Source of Squares Df Mean Square F Sig.
Corrected Model 17.855(a) 5 3.571 17.475 .000
Intercept 8.443 1 8.443 41.320 .000
Native_region .694 1 .694 3.397 .067
Income 3.011 1 3.011 14.735 .000
Sex .248 1 .248 1.215 .271
Age 4.010 1 4.010 19.622 .000
Marital_Status .309 1 .309 1.515 .220
Error 46.590 228 .204
Total 804.000 234
Corrected Total 64.444 233
a R Squared = .277 (Adjusted R Squared = .261)

Native Region:

Tests of Between-Subjects Effects

Dependent Variable: Risk_score

Type III Sum
Source of Squares df Mean Square F Sig.
Corrected Model 18.776(a) 10 1.878 9.168 .000
Intercept 10.743 1 10.743 52.460 .000
Income 3.403 1 3.403 16.617 .000
Sex .388 1 .388 1.892 .170
Age 3.821 1 3.821 18.658 .000
Marital_Status .099 1 .099 .482 .488
No.of_dependents .712 1 .712 3.476 .064
Native_region .770 5 .154 .752 .585
Error 45.669 223 .205
Total 804.000 234
Corrected Total 64.444 233
a R Squared = .291 (Adjusted R Squared = .260)

Page | 21
Income:
Tests of Between-Subjects Effects

Dependent Variable: Risk_score

Type III Sum
Source of Squares df Mean Square F Sig.
Corrected Model 18.950(a) 10 1.895 9.289 .000
Intercept 16.391 1 16.391 80.345 .000
Sex .381 1 .381 1.868 .173
Age 3.911 1 3.911 19.172 .000
Marital_Status .118 1 .118 .577 .448
No.of_dependents .535 1 .535 2.621 .107
Native_region .562 1 .562 2.752 .099
Income 4.078 5 .816 3.998 .002
Error 45.494 223 .204
Total 804.000 234
Corrected Total 64.444 233
a R Squared = .294 (Adjusted R Squared = .262)

Output of Cluster analysis:

Iteration History(a)

Change in Cluster Centers

Iteration 1 2 3
1 2.317 2.536 2.850
2 .202 .062 .193
3 .040 .128 .291
4 .060 .176 .321
5 .200 .245 .392
6 .091 .200 .183
7 .000 .047 .043
8 .000 .031 .028
9 .000 .097 .082
10 .000 .000 .000
a Convergence achieved due to no or small change in cluster centers. The maximum absolute coordinate
change for any center is .000. The current iteration is 10. The minimum distance between initial centers is
6.708.

Page | 22
Final Cluster Centers

Cluster
1 2 3
Sex 1.48 1.44 1.32
Age 4.67 1.88 2.34
Marital_Status 1.00 1.20 1.36
No.of_dependents 1.97 2.41 2.29
Native_region 1.42 4.79 1.76
Income 1.33 1.54 2.52
Risk_score 1.47 1.74 2.01

Number of Cases in each Cluster

Cluster 1 60.000
2 80.000
3 94.000
Valid 234.000
Missing .000

ANOVA

Cluster Error
Mean Square df Mean Square df F Sig.
Risk_score 5.517 2 .231 231 23.862 .000
Sex .571 2 .239 231 2.396 .093
Age 148.627 2 .888 231 167.323 .000
Marital_Status 2.407 2 .149 231 16.116 .000
No.of_dependents 3.529 2 1.154 231 3.058 .049
Native_region 265.655 2 .802 231 331.096 .000
Income 32.986 2 .722 231 45.715 .000
The F tests should be used only for descriptive purposes because the clusters have been chosen to maximize
the differences among cases in different clusters. The observed significance levels are not corrected for this and
thus cannot be interpreted as tests of the hypothesis that the cluster means are equal.

Page | 23