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Evaluating measures of individual investors' expectations of risk and return
Umeå University, Faculty of Social Sciences, Umeå School of Business and Economics (USBE), Business Administration.
Umeå University, Faculty of Social Sciences, Umeå School of Business and Economics (USBE), Business Administration.
Umeå University, Faculty of Social Sciences, Umeå School of Business and Economics (USBE), Business Administration.
2017 (English)In: Review of Behavioral Finance, ISSN 1940-5979, Vol. 9, no 3, p. 206-226Article in journal (Refereed) Published
Abstract [en]

Purpose

The purpose of this paper is to measure individual investors’ expectations of risk and return and to evaluate different expectation measures.

Design/methodology/approach

The authors measure individual investors’ expectations of risk and return regarding an index fund and two stocks using survey data on a random sample of individual investors in Sweden. The survey contains three different return and four different risk expectation measures. To evaluate the different expectation measures, three different evaluation perspectives are considered.

Findings

The risk expectations obtained from the different measures are positively correlated across respondents, but their average magnitudes differ considerably across measures. The return expectations are also positively correlated, and their magnitudes also differ, but to a lesser extent. Consequently, the same individual can express risk expectations that either underestimate or overestimate the forward risk, depending on the measure that is used. The variations in the expectations mainly relate to differences in the responses to the questions underlying the different measures, rather than to the methods used to obtain the expectations. The results from the evaluation of the measures indicate that the expectation measure proposed by Dominitz and Manski (2011) is the only measure for which it is possible to distinguish between individuals’ expectations, using all three of the evaluation perspectives.

Originality/value

This is, to the best of the authors’ knowledge, the first paper that evaluates different survey measures of individual investors’ expectations of risk and return.

Place, publisher, year, edition, pages
2017. Vol. 9, no 3, p. 206-226
Keywords [en]
Expectations, Risk, Beliefs, Return, Subjective probability
National Category
Business Administration
Identifiers
URN: urn:nbn:se:umu:diva-140746DOI: 10.1108/RBF-10-2016-0066ISI: 000411490100001OAI: oai:DiVA.org:umu-140746DiVA, id: diva2:1150261
Available from: 2017-10-18 Created: 2017-10-18 Last updated: 2018-06-09Bibliographically approved

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Hellström, JörgenOlsson, RickardStålnacke, Oscar

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CiteExportLink to record
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Citation style
  • apa
  • ieee
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