Author: Chan, To
Title: An integrated approach to financial planning in Hong Kong
Degree: M.Phil.
Year: 2003
Subject: Hong Kong Polytechnic University -- Dissertations
Finance, Personal -- China -- Hong Kong
Investments -- China -- Hong Kong
Department: Department of Business Studies
Pages: 199 leaves : ill. ; 30 cm
Language: English
Abstract: This study evaluates a financial planning approach integrating the concept of human capital and measurements of risk tolerance for Hong Kong people. The first essay focuses on the effects of human capital on the optimal portfolio, and the second essay studies the risk tolerance assessments using survey data of Hong Kong. The first essay employs a closed-form solution for optimal asset allocation developed by Chan and Viceira (2000) for simulation and a survey data of US to compare with the Hong Kong data. The results indicate that Hong Kong people working in particular industries could benefit from the hedging effect provided by their human capital. Ignoring this effect would lead to under-investment. Also, the nonlinear effect of risk tolerance on the optimal portfolio becomes more significant under a long investment horizon. Furthermore, the comparison between the US and Hong Kong survey data reveals that there is no significant difference in the risk tolerance distribution. The results also show that risk and return of investment, and risk tolerance of investor are the most significant factors for the asset allocation strategy. Although the effects of labor supply flexibility and hedging effect of human capital are relatively weaker, their impacts are still significant for investors. The second essay investigates the effect of demographic and subjective factors on two risk tolerance assessments: utility equivalent measure and psychometric measure. It is found that the utility equivalent measure provides an accurate classification for the average high risk tolerance group. The psychometric measure provides an accurate classification for high risk tolerance group and low risk tolerance group, but fail to do so for the average risk tolerance group. Setting aside the prediction ability of the demographic and socioeconomic factors, there is a consistent evident supporting that risk tolerance level is inversely related to age. New evidences show that proxy of labor supply flexibility is positively relate to the risk tolerance level. Weak evidences in the results show that (1) low education level is related to low risk tolerance, (2) male has higher risk tolerance measured by the psychometric questions than female, and (3) job security fairly related to the stock market return is related to higher risk tolerance level measured by utility equivalent question. It is interesting to find that subjective hedging effect and years before retirement doest not affects risk tolerance. Furthermore, the effects of income level on the utility equivalent measure and the psychometric measure are mixed. Overall, the results suggest that some demographic and subjective factors are related to risk tolerance, but the explanatory power of the demographic and subjective factors on risk tolerance is not satisfactory. Therefore, financial planning practitioners should not rely on heuristic judgment to evaluate clients' risk tolerance level.
Rights: All rights reserved
Access: open access

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