An investment framework based on risk tolerance : a case of Vaal Triangle students

Abstract

This study aimed at constructing an investment framework for students based on their risk tolerance level. The study reviewed current market investment products that could be suitable for students and this created the investment framework. Risk tolerance levels were also discussed and analyzed. Analysing students risk tolerance during the investor life cycle is imperative to students and financial planners alike, to facilitate the implementation of suitable investments and investment strategies. Students in universities do not have the required knowledge to make good investment decisions and this is why an investment framework was created to assist, guide and inform students of what stage of the individual investor life cycle that they are in and suggest suitable investment strategies. The theoretical objectives provided an analysis of the risk tolerance, as well as the demographics of students. The theoretical framework was contextualised and assisted in achieving the empirical objectives of the study. Demographical and socio-economic factors affect the risk tolerance of students and how much risk they are willing to tolerate. It was found that gender and race have a positive relationship with risk tolerance and that females have a higher risk tolerance than males, which is contradictory to other studies. This was discovered by the use of one-way ANOVA to determine whether there is a relationship between risk tolerance and the variables that were used in the study. The study implemented a quantitative approach, using secondary data analysis. The data used for the analysis is from a self-administered questionnaire in 2017 that was distributed to a sample of 396 students from two higher education institutions in the Vaal Triangle region. Two validated risk tolerance scales were used to analyse students risk tolerance levels. Statistical analysis was conducted, using SPSS software. The first empirical objective was to determine the risk tolerance levels of students in the Vaal Triangle region. The two results from the 13-item scale and the single-item scale for measuring risk tolerance indicated that the participants have a medium risk tolerance level. Since the 13-item risk tolerance scale and the SCF scale have similar results and the 13-item risk tolerance measures risk tolerance from multidimensional levels, the results from both the SCF as well as the 13-item risk tolerance scale results were used throughout the rest of the study, similar to previous studies. To accurately determine student investors risk profiles and ensure that there was a successful implementation of investment strategies when making a decision, an analysis of risk tolerance and investment decisions of student investors was done. There was only one significant difference between means found in the investment type group, and only with regards to risk tolerance, i.e., between participants that invest in clubs or groups, like stokvels, and participants who did not invest that would also not consider investing. No other important differences in levels of risk tolerance or subjective risk profiles were found, regardless of type of investment. The third empirical objective was to determine the risk tolerance relationship of students based on gender and year of study. In regards to gender, it was concluded that there was a relationship with the Grable scale total and risk profile with gender. There was no particular relationship that was identified between the student’s year of study and their risk tolerance level. These results were contrary to previous studies. The fourth empirical objective was to determine the objective and subjective risk tolerance according to demographics. In terms of gender, both the objective risk tolerance scale and the subjective risk tolerance profile indicated a significant difference in risk tolerance. Hence, both scales reported similar results. There was no difference in the objective and subjective risk tolerance between the different racial groups. Both scales indicated a difference in risk tolerance within the groups. For the other demographics, year group, situation, monthly income, source of that income and the number of dependents, no statistical difference in the mean values were found between groups for both objective risk tolerance and the subjective risk tolerance profile. It is also pivotal that individual investors know what stage of the investor life cycle they are in as this will assist in managing an effective investment portfolio and the correct asset allocation in the different phases of the life cycle. The framework was created whereby there are different steps that need to be looked at before taking the decision of what investment to invest in. The framework consisted of nine steps, these include the individual investor life cycle, investor objectives and constraints, risk tolerance levels, asset classes that could be invested in, demographics of individuals and how they affect risk tolerance, the risk appetite of the individual, subjective and objective risk tolerance, the different risk tolerance categories concluding with the best investment options for individuals in the different phases of the individual investor life cycle. The conclusions and findings of this study contribute to research by provide students with a basic framework to implement investment strategies to follow to achieve their investment goals.