Financial Literacy and Risk Tolerance

Abstract

In finance, the basic assumption regarding human behavior is that of risk aversion. Humans by nature tend to avoid risk. Risk aversion, for our purposes, is defined as simply the tendency for people to avoid risk, in this case risky investments. Similarly, one's risk tolerance is how much risk individuals are willing to take on to accomplish a financial goal. The potential for a relationship between one's financial literacy and risk tolerance is tested using information gathered via a cross-sectional survey to SUNY Brockport students. The survey consists primarily of two parts, with a focus on first collecting information assessing the participants' financial literacy and second their risk tolerance. This information is analyzed through an equality of means t-Test across subsamples. Developing a deeper understanding of the topic is crucial as the primary goal of investment advisors is to assist clients in the attainment of their financial goals. That is, achieving the best combination of risk and return for the client. Our findings suggest that in the studied sample, I am unable to demonstrate a strong relationship between financial literacy and risk tolerance. The study adds to the existing literature on the relationship between financial literacy and risk tolerance.