Do Large Swings in Equity Values Change Risk Tolerance?
Guillemette, Michael and Michael Finke. 2014. “Do Large Swings in Equity Values Change Risk Tolerance?” Journal of Financial Planning 27 (6): 44-50.
7 Pages Posted: 2 Jun 2014
Date Written: June 1, 2014
Changes in average FinaMetrica monthly risk tolerance scores were evaluated during the January 2007 to May 2012 time period that spanned the global financial crisis. The research objective was to test whether fluctuations in equity returns influence average risk tolerance scores over time. A strong positive correlation (0.70) between average monthly risk tolerance scores and the S&P 500 was noted. The standard deviation for average monthly risk tolerance scores was relatively low (1.86 percent) compared to monthly S&P 500 values (17.27 percent). Average monthly risk tolerance scores increased as price/earnings ratios increased and decreased as dividend yields increased. Respondents became less risk tolerant as equity valuations became more attractive. Average risk tolerance scores demonstrated little monthly variation despite large swings in equity values during this time period. This suggests that individual risk tolerance scores are determined more by individual preference than external market forces.
Keywords: risk tolerance, risk aversion, equity values
JEL Classification: D81
Suggested Citation: Suggested Citation