The Role of Financial Literacy in Financial Risk Tolerance

Abstract

Financial literacy enables an individual to understand about risk-return trade-offs and fosters confidence in managing potential losses. The current study examined the role of financial literacy in financial risk tolerance among individual investors of Nepal. Financial literacy was operationalized using "The Big Three" measure, while financial risk tolerance is assessed using the widely validated 13-item Grable-Lytton Risk-Tolerance Scale. Data was collected from 302 respondents with structured questionnaire using a cross-sectional survey. Ordinary least squares regression was used to examine the association between financial literacy and financial risk tolerance while controlling for demographic and investment related characteristics.  The finding reveals that financial literacy positively and significantly is related with financial risk tolerance. The finding supports financial literacy as a key factor of financial risk tolerance and suggests the need of literacy-enhancing program for more informed decision in risky financial markets. The finding contributes to the growing body of literature on investment context in Nepal and highlights the relevance of financial knowledge and investment experience to investors’ risk-related decision making.