Abstract:
Since the recession of 2008, many financial advisors and investors have begun to take a closer look at the holdings within their respective portfolios. These holdings are a two-fold reflection of risk and return. First, they are a signal as to the amount of risk a client or investor has chosen to tolerate. Second, they are an indication as to the type of financial instruments or products the client or investor has chosen to seek their return objectives. This study addresses this balance between risk and return with papers addressing both sides of this scale. The first paper concentrates on developing a more valid and reliable financial risk tolerance (FRT) questionnaire. Specifically, we use factor analysis and find five factors for measuring FRT. Our results have obvious uses for financial planning, particularly portfolio allocation. The second and third paper address the effects of expected market volatility on a not well understood group of relatively new financial instruments called leveraged and inverse exchange traded funds (ETFs). The second paper specifically looks at the daily returns of these specific ETFs and finds that expected market volatility and the daily change in expected market volatility have significant effects on daily returns. The third paper examines long-term holding strategies for these specific ETFs and finds that expected market volatility has a significant effect on long-term returns. These results suggest that volatility indexes may be used to devise trading rules for these specific ETFs. In the end, the results of these three papers accomplished the goal of this research as a whole, which was to better equip advisors and investors with the tools and information needed to balance the risk and return within their respective portfolios.
