Investment Risk Appetite (IRA): Scale Development and Validation

Investment Risk Appetite (IRA) is a pivotal concept in risk management, reflecting an investor’s willingness to tolerate financial risks within acceptable thresholds. As empirical investigations into this construct gain momentum, there is a growing need for a scientifically validated tool to facilitate in-depth examinations of risk appetite. There are no scales to measure risk appetite. The present study addresses this gap by developing and validating a scale on risk appetite. Leveraging data collected from 405 respondents and employing established methodologies, the study introduces the Investment Risk Appetite (IRA) Scale. The questionnaire had a five-point scale. The scale consists of two factors: risk tolerance (α = 0.837, composite reliability = 0.836) and risk aversion (α = 0.905, composite reliability = 0.906). The validation was done by exploratory and confirmatory factor analysis (EFA and CFA). The loadings for EFA and CFA exceeded the threshold limit of 0.40. The scale demonstrates robust internal consistency, content, and construct validity. Hence, this scale has all the required validity. Overall, this scale demonstrates robust validity and reliability. In addition, this study examined the differences based on the demographics of the respondents. The scale, poised to make a significant contribution to the literature on risk appetite, will provide a theoretical foundation for future in-depth investigations. This study is expected to inspire future empirical examinations of this compelling construct.