An Empirical Analysis of the Risk-Return Preferences of Individual Investors

In summary, the ex ante evidence suggests strong preference relationships for the three sets of risk-return variables analyzed. Further, there appear to be differences among the nature and shape of the relationships as evidenced by the statistical tests: one, the association between risk and expected annual rate of return appears positive; two, the risk-dividends relationship appears negative; and, three, the risk-capital appreciation relationship appears positive.The study suggests several implications, including directions for further research. First, this study provides positive evidence on the ex ante risk- return preferences and expectations of individual common-stock investors. Second, while this study is not directly comparable to previous studies as to method or investor type, the results are generally consistent with previous research concerning the positive nature of overall risk-return relationships. Third, the positive association between risk and expected return appears due to the impact of capital appreciation in investor expectations of total return. Nonetheless, there is evidence of a "clientele effect" among individual investors. Fourth, additional studies of a positive nature' are needed which over- come the various shortcomings of this study and research of this type. These shortcomings include: limited sample, time period, and area; problems associated with interpersonal comparisons of risk behavior based on scaled responses; limited methodology which precludes more precise functional specification of the risk-return relationships; lack of a multivariate model to adjust for the impact of various investor socio-economic characteristics on the preference relationships; and the need to explore positive aspects of the decision process for other than individual investors