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Abstract
This paper addresses the issue of association between investors' demographics and risk bearing capacity by presenting detailed evidence. It provides empirical results that characterise the relationship between various demographic characteristics and the risk exposure of individual portfolios. The evidence from cross sectional data suggests that individuals' demographic characteristics does have strong association with their risk bearing capacity. This study is first of its kind on Indian Investors bringing out interesting facts hither to unexplored, which can be of use to the financial community in general and to financial product designers and marketers in particular. The study confirms the earlier findings regarding the relationship between age and income and the risk bearing capacity of investors. The study finds out that changes in risk averse investors, which create a demand for new products.
Introduction
RISK MAY BE defined as the chance that an investor will not achieve the terminal amount necessary at the time required. The investor must understand that he cannot avoid risk, and it is not possible to find a risk free investment. Hence, he must decide regarding the categories of risk to which he is willing to expose his portfolio and understand the return implications of that risk exposure. Risk really is not a question of objectivity for most people; it is an emotional question. Individuals' risk tolerance is unique and subject to changes influenced by the investor's wealth position, health, family situation, age temperament etc. Although individuals' behavior toward risk is at the heart of modern finance theory, unresolved issues continue.
There is a need to understand the risk capacity of the individual investors. Individual's willingness to accept risk and his capacity to undertake risk is an important piece of information. Changes in investor risk aversion create a demand for new products such as zero-coupon bonds, Special Premium Notes, Triple Option Convertible Debentures, variable'rate preferred stock etc. If individual investors perceive that an advantageous risk return relationship exists among small firms, then over-the-counter stocks and new issues may be priced differently relative to firms with large capitalization. Professional managers are currently responding to assumed changes in individual investor attitudes by offering new products such as mutual funds specializing in the common stocks of new firms, Information Technology firms, Bombay Stock...