The purpose of this paper is to investigate the relationship between individual investors’ level of sophistication and their expectations of risk and return in the stock market.
The author combines survey and registry data on individual investors in Sweden to obtain 11 sophistication proxies that previous research has related to individuals’ financial decisions. These proxies are related to a survey measure regarding individual investors’ expectations of risk and return in an index fund using linear regressions.
The findings in this paper indicate that sophisticated investors have lower risk and higher return expectations that are closer to objective measures than those of less-sophisticated investors.
These results are important, since they enhance the understanding of the underlying mechanisms through which sophistication can influence financial decisions.
