A Study On Investment Decision Making Of Casual Investors In Risky Instruments

Abstract

Investors hedge their funds by investing in a portfolio of high and low risk instruments. Many portfolio management theories (such as Markowitz Portfolio Utility Theory, Sharpe Single Index Model and Capital Asset Pricing Method) have been proposed in an attempt to design an optimal portfolio. However, casual investors do not have detailed knowledge of these theories or calculations involved therein to make an informed investment (Al-Azmi, 2008; Alexander et al., 1997; Wilcox, 2003; Capon et al., 1994). Casual investors form a big chunk of prospects for the financial services companies (such as mutual funds companies, insurance firms, and banks). These firms attempt to such investors by developing financial products that seem to provide high returns with low risk. However, these investors hardly understand such complex financial jargon (Bhalla, 2004 and Chandra, 2005) and tend to make investment decisions based on other factors, not necessarily financial. newlineThe objective of this study is therefore to examine the investment behavior of casual investors. The financial products are developed based on detailed financial calculations using portfolio management models. However, these portfolio management models, and hence the financial products, will be useful only when they predict returns with reasonable accuracy. Therefore, we first examine the effectiveness of portfolio management models in predicting return on investments. Accordingly, the first research question examined in this study is: How effective are portfolio management models in terms of predicting return on investment for casual investors? We also need to examine the factors that influence a casual investors investment decision making, so that financial services providers can develop different strategies to target these investors. Therefore, we attempt to identify the factors that influence the investment decision of a casual investor. The relevant research question is: What are the factors that newlineinfluence the investment decision making of casual investors?