July 22, 2008

Research Proposal on the Difference in Investment Asset Allocation of Government Employees vs MNC Employees

 

 

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1) Introduction

            The research will seek to investigate the differences on strategies employed by government and MNC employees when it comes to allocating their assets or wealth. It is necessary to note that the components of compensation, benefits packages and the nature and financial capability of the government and the MNCs vary greatly. This idea is particularly of relevance to the subject because these are the principles that contribute to the differences on investment asset allocation strategies.

There are numerous ways to categorise financial assets as equities (including directly-held stocks and other indirectly-held stocks through mutual funds, retirement accounts, and etc.); bonds (including directly-held bonds and other indirectly-held bonds through mutual funds, retirement accounts, and etc.); cash accounts (including cash, certificates of deposit, and liquid accounts) and other financial assets. So there are many ways that government and MNC employees differ in the way they invest.

In this proposal, the theoretical framework, research hypothesis and empirical methodology are presented. The proposal also includes the reason why the research seeks to investigate the topic, the questions o be answered and the objectives to be accomplished. The initial review of contributing literatures is demonstrated along with how the researcher will go about the completion of the research.   

2) Theoretical Framework

            The first theory that supports the aims of the study is Expected Utility Theory (EUT). This utility-based model has a direct significance on the subject since it deals with the economics of uncertainty. To wit, investors maximise their expected utility in lieu with their assets. The theory states decisions are made based on the comparison of risk or uncertain viewpoint with expected utility values. The probabilities are described by the following concepts:

            a) Expected utility

                        The investors expected utility are based on assumptions regarding his or her predilections in order to arrive at expected utility function. Varian's notation (p±x_(1¡p)±y) is used which means that receiving x with probability p and y with probability (1 ¡ p). If the equation satisfies the investment axioms of individual investors the there is a utility function u, which ranks the predilections of each investor.

            b)  Risk aversion

Utilities make the investors risk averse. The tendency is for them to take certain amount of asset than take a gamble with an expected payout that is slightly larger than that certain amount. This inequality is represented by a concave utility functions that if f(x) is a strictly concave function then E[f(x)] < f(E[x]).

            c) Utility functions

There are three utility functions that are applicable for these investors: constant relative risk aversion (CRRA) or power utility function, [u(x) = x; 2 (0; 1)], constant absolute risk aversion (CARA), [u(x) = 1 ¡ e¡¸x; ¸ > 0] and quadratic utility function [u(x) = a + bx ¡ cx2; b; c > 0].

            d) Stochastic dominance

Risk aversion is applicable to the investors and to measure risk factors for the investment as compared to another investment, stochastic dominance must be used. First stochastic dominance shows an increasing utility functions, u(x).  

           

            The second framework that the research will going to use is the Capital Asset Pricing Model (CAPM) which was originally developed by Harry Markowitz in 1952. This model describes the relationship between risk and expected return and is more applicable in terms of pricing risky securities. CAPM maintains that investors' expected return of security or portfolio equals the rate on a risk-free security plus the risk premium. If the expected return does not meet the required return, therefore the investment should not be undertaken. The commonly used formula to describe the relationship is [Required (or expected) Return  =  RF Rate + (Market Return - RF Rate)*Beta].  

 

            The third framework that will be use is financial assets categories. This is commonly used in trading where an asset or liability that includes derivatives which are acquired or incurred principally for the purpose of profit generation from short-term fluctuations in price or margin. A common category is held-to-maturity (HTM) or the financial assets with fixed or determinable payments and fixed maturity that an enterprise has the positive intent and ability to hold to maturity other than loans and other receivables. These assets could have callable or puttable financial assets.

3) Research Hypothesis

1          Investors that come from MNCs are more risk averse compared to investors that came from the government. The reason for this is that the government has a more stable and strong financial capability compared to MNCs.

2          The asset allocation strategies of MNC employees are more structured compared to that of government employees. The reason for this is that their remuneration and benefits package provide them with extra money to afford a professional financial planner and analysts.

3          The MNC employees hold a widely-ranged investment portfolio and thus asset allocation strategies compared to government employees' minimal investment portfolio.

4          MNC employees possess at least five categories of financial assets compared to government employees with only two categories.    

4) Empirical Methodology

            The experiential methods that the research will integrate are Repeated-Imputation Inference (RII) statistical method and Risk Tolerance Analysis. Repeated-Imputation Inference (RII) technique is applicable for estimating nonlinear models with multiply imputed data. RII technique could be used to estimate a logit model of asset allocation in terms of investment. This technique considers existing data variables in multiply imputed data and incorporates estimates of imputation error. The advantage of RII technique is evident on producing more efficient estimates and providing a basis for more valid inference.

            The Risk Tolerance Analysis measures the sensitivity of the investments and the assets per se. The initiative aimed at strategic positioning of the assets wherein profit could be maximized. The purpose of this analysis is to identify inclination of certain assets to positivity and negativity. It is a utility-based schema that focuses on examining the risk tolerance of the individual investors and thus effectively allocates the wealth.      

5) Purpose of the Study

            The main purpose of this research is to compare different investment allocation strategies of two very different demographies and industry – government and MNC employees. As such, there are differing ways of remuneration structures, benefit frameworks and thus there may be significant differences on how they allocate their financial assets in terms of investment. Further, this research purports on investigating the factors which are likely to influence the employees' decision to allocate a certain amount of their asset in a particular investment. Some examples of these factors will include age, lifestyle, dependencies, knowledge, expertise and position among others. 

6) Research Objectives

            The main of the research is to compare the investment asset allocation of government and MNC employees. Specifically, the study will seek to accomplish the following objectives:

  • To determine the differences on asset allocation of two different categories and industry
  • To determine the differences on asset allocation by government and MNC employees based on the category of their financial assets
  • To distinguish the various factors that influence these investors in terms of deciding where to invest their financial assets
  • To identify the reasons why government and MNC employees chose to employ a particular asset allocation strategy
  • To determine and compare the effects of their respective averages on risk and return and to identify which is more risk averse
  • To established the concept of risk tolerance and utility functions for government and MNC employees
  • To established the function of investment policy

7) Research Questions

            The research will attempt at giving answers to these questions:

  1. What are the differences in investment asset allocation of government and MNC employees?
  2. What are the factors that largely contribute to the differences on investment asset allocation between government and MNC employees? Are there any similarities? What are those?
  3. Considering the average of both, what will be the implications on risk and return? Which is more risk averse?
  4. Are risk tolerance and utility functions could possibly could accurately reflect the differences in investment asset allocation of government and MNC employees? In what way? 
  5.  What is the role of investment policy? Why is it important?
  6. What are the current asset allocation strategies for government employees? for MNC employees? What are the reasons why they chose that particular strategy?

8) Literature Review

            A literature review will be provided in the actual study. Literatures will be about different strategies to allocate wealth; risk aversion, investment risks, utility functions of risks and managing limited and diverse financial assets specifically. Literatures will be acquired mostly from academic journals which can be found in the Internet via Blackwell Synergy, Emerald and Questia and university websites. Literatures will be reviewed and analyzed thoroughly so as to increase knowledge database.

            The initial search proved that there are many related studies and articles with this study. However, none of them specifically discuss the differences in asset allocation of MNC and government employees and none of them include a specific respondents' demography. Most of the preliminary literatures came from journals including: Journal of Wealth Management, Financial Analysts Journal, Journal of Financial Planning, Journal of Investing and Journal of Performance Management; others are Financial Services Review and Handbook of Economics of Finance.

            Most of the articles concern the role of investment policy and asset allocation policy, strategic asset allocation and its impact on portfolio performance, the problems that confronts investors regarding asset allocation, how to calculate asset allocation, the preconception of the investors and asset pricing.

9) Research Design

            The research will be exploratory in nature. An exploratory research enables the researcher to dwell into the study through looking at the subject in both descriptive and exploratory manner. The researcher will use questionnaires, observations and document analysis. The range of qualitative and quantitative data will definitely provide the depth and breadth of the research.

The research will adapt an interpretivist approach since it allows the discovery of the details of the situation to understand a specific reality or perhaps the reality that works behind them. It is necessary to explore the subjective meanings that motivate the investors in order to understand the differences in their asset allocation strategies. The timeline of the study, however, will only be cross-sectional because of the time constraint.    

Collection of Data

            In this research, both primary and secondary research will be incorporated. The reason behind this is to be able to provide adequate discussion about the subject and the different variables that are involved. Primary will represented by the results and findings that will be acquired from the respondents. The literature reviews to be presented in the formal research paper will be the secondary data of the study.

Primary Data

            The primary sources of the data will come from the responses on the semi-structured questionnaires and interviews. I would be selecting 100 employee-investors representatives (50 from government and 50 from MNC) that met the inclusion criteria.

Secondary Data

            The secondary sources of data will come from published articles from journals, Internet, theses and related studies, books and magazines and newspapers. In addition, I will include company reports and government and MNC databases.

Sampling Frame

            The study will sample a target number of 50 government employees and 50 MNC employees. The samples will be chosen through purposive sampling technique. Purposive sampling refers to a sampling method where there is specified demographic profile of respondents. Investors will be identified through their company's executives, company survey or referrals. In order to be included on the population, respondents must meet the criteria to be discussed below. 

            The criteria for sampling are that the respondents should be either a government or MNC employee and should be living within the boundaries of Bangalore. They should be involved in investing and asset allocating activities. In addition, the respondents should be included in the Rs.20 Thousand to Rs.1 Lakh per month. These specific demographic requirements have been included into this study to make the results more specific.


1 comment:

A said...

It would be interesting to see the fruits of the labor on this research. These ideas would constitute a firm recommendation for a sound investment policy statement to take by parties involved.

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