RIsk SCreening on the Financial Market (RISC-FM): A tool to assess investors’ financial risk tolerance

Abstract

To advise investors on the financial market according to their financial risk tolerance it is necessary to apply a valid and reliable instrument measuring financial risk tolerance. We develop a screening instrument which assesses different facets of financial risk tolerance, namely, risk propensity, risk attitude, risk capacity, and risk knowledge. First, an item pool was generated and discussed with lay people as well as financial advisors to assure the questions’ understandability and answerability. Second, the most coherent and practice-oriented questions were tested empirically to determine four scales representing the four facets of risk tolerance. Third, resulting items were assessed using a representative sample of Austrian citizens interested in saving, stock trading, and investing, and psychometric quality of the instrument was determined.

Keywords

• assessment
• financial risk tolerance
• scale construction
• investment behavior