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Investor Rationality in Index Funds: An Analysis of the Swedish Investor Rationality when Investing in Index Funds
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.
2019 (English)Independent thesis Advanced level (professional degree), 20 credits / 30 HE creditsStudent thesis
Abstract [en]

iiABSTRACTBehavioral finance has been a popular research subject for a while and therefore the understanding of human behavior when it comes to private financial investments has increased. When comparing human behavior to the financial theories one can conclude thatthe assumption of perfect and efficient markets with fully informed and rational investors is not realistic. This study has therefore looked at the investor rationality when choosing which index fund to invest in. Index funds are to a large degree used asa savings tool for either pensions or other specific purposes. It was therefore interesting to look at the behavior of Swedish investors buyingthe Swedishindex funds available in Sweden with a quantitative analysis of the relationship between flow and other features of index funds. The dependent variable reflecting rationality was the fund flow and the independent variables were return, tracking error, size, fee and risk. No previous studies have been made on the investor rationality regarding index funds in the Swedish market, although similar studies havebeen done on the American S&P 500 investors. 17 index funds were included in this study, which is the whole population of index funds following Swedish indices available in Sweden at the point of time when this study was conducted. From this population funds that had been available for more than 3 years was chosen since we wanted to look at the behavior based on a longer time span than one year. In the end, 17index funds with 51observations was included in the study.Five hypotheses were created and tested of whichtwowereaccepted. From the regression model we found that return and standard deviation (SD) weresignificant andhadpositiverelationshipswith the fund flow. This implies that Swedish investors are rational to some degree but not fully rational since they are not taking any of the other variables into account which a rational investor ought to consider. It is therefore useful information for both investors and fund companies to see which factors weight in the most and how rational the behavior is. Conclusions from this study is that Swedish investors are subject to the index fund rationality paradox to some degree and the rational choice theory applies to some extent. One has to fully consider the outcomes of an action and base the decisionon utility maximization that the outcome will give one. To act fully rational is hard even for the most aware investor and even harder for an ordinary investor with gaps in knowledge and limited resources to information.

Place, publisher, year, edition, pages
2019.
Keywords [en]
Index Fund, Investor Rationality, Behavioral Finance, Benchmark Index, Sweden.
National Category
Business Administration
Identifiers
URN: urn:nbn:se:umu:diva-164237OAI: oai:DiVA.org:umu-164237DiVA, id: diva2:1362074
Educational program
International Business Program
Supervisors
Examiners
Available from: 2019-10-18 Created: 2019-10-17 Last updated: 2019-10-18Bibliographically approved

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CiteExportLink to record
Permanent link

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Citation style
  • apa
  • ieee
  • modern-language-association-8th-edition
  • vancouver
  • Other style
More styles
Language
  • de-DE
  • en-GB
  • en-US
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  • nn-NB
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  • Other locale
More languages
Output format
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  • text
  • asciidoc
  • rtf