The Impact of Demographic Characteristics and Risk Tolerance on Investors’ Risk Perception and Portfolio Management

Abstract

Behavioral finance focuses on psychological factors—such as risk perception and portfolio management—that play a crucial role in investors’ financial decisionmaking. This study investigates the effect of risk tolerance and demographic characteristics on risk perception and portfolio management, which, in turn, affect investors’ decisions. Applying structural equation modeling to data collected from a sample of 120 respondents, we find a significant and positive relationship between risk perception and risk tolerance. Similarly, certain demographic characteristics, such as age and education, have a significant and positive relationship with risk perception while others, such as income and gender, have a significant but negative relationship with risk perception. Risk tolerance has a significant but negative relationship with portfolio management. Age, education, and income have a significant but negative relationship with portfolio management, while gender has a significant and positive relationship with portfolio management.