The Impact of Investors’ Perception of Risk on Portfolio Management: Evidence from the Kingdom of Bahrain

Abstract

The Study of risk perception and its impact on investors’ behavior is well established in the literature of behavioral finance. Plentiful studies have been conducted to explore, investigate and measure this link. However, very few of them attempt to find this link in the context of portfolio management. Therefore, the purpose of this study is to test empirically the impact of investors’ perception of risk on portfolio management in the Kingdom of Bahrain. This study draws on 151 questionnaire surveys of investors in Bahrain. Participants were asked to assess one randomly selected portfolio type (from P (A) to P (F)) on a questionnaire consisting of 33 determents of the risk perception which were selected from the surveys of previous studies. Subsequently, a model of determinants of perceived risk and portfolio management was developed and tested. Furthermore, the data were analyzed using linear stepwise regression and factor analysis with varimax rotation. Suitability of the data was checked by calculating the Kaiser-Meyer-Olkin (KMO) value and analyzing the anti-image-covariance-matrix. The results reveal that perceived portfolio risk is not only affected by quantitative aspects of potential losses and gains but also qualitative manifestations evidence to be pertinent. Worry & anxiety, liquidity; and the level of confidence in the economy and/or the stock market load high on the factor representing the perceived risk by investors which is associated with portfolio management in the Kingdom of Bahrain.

KEY WORDS: Portfolio   Management-   Risk   Perception-   Behavioral   Finance-   Investment

Decisions- Kingdom of Bahrain.