Đề tài nghiên cứu khoa học: Financial Literacy and Portfolio Diversification with the Mediating Role of Risk Perception in Vietnam Stock Market: The Empirical Evidence from Generation Z in Vietnam

The objectives of research Lan The research aims to identify the relationship of financial literacy and portfolio diversification in Vietnam which hence clarify the general phenomena ex

BÁO CÁO TỔNG KẾT

ĐỀ TÀI THAM DỰ CUỘC THI “SINH VIÊN NGHIÊN CỨU KHOA HỌC”

CẤP HỌC VIỆN NGÂN HÀNG NĂM HỌC 2023-2024

TÊN ĐỀ TÀI: Financial Literacy and Portfolio Diversification with the Mediating Role

of Risk Perception in Vietnam Stock Market: The Empirical Evidence from Generation

Z in Viet Nam

LĨNH VỰC: Tài chính

CHUYÊN NGÀNH: Tài chính-Ngân hàng

Hà Nội, Tháng 05 Năm 2024

Table of Content

PROLOGUE 7

The urgency of the subject 7

The objectives of research 8

Subjects and scope of research 8

Research Methodology 9

Research Structure 9

Chapter 1: Literature Review and Overview of Financial Literacy, Risk Perception, and Portfolio Diversification 10

1.1, Overview of Financial Literacy 10

1.1.1, Definition of Financial Literacy 11

1.1.2, The Importance of Financial Literacy 12

1.1.3, Financial Literacy Measurements 13

1.2, Portfolio Diversification (PD) 14

1.2.1, Definition of Portfolio Diversification (PD) 14

1.2.2, The Importance of portfolio diversification 15

1.2.3, Portfolio Diversification Measurement 16

1,3, Risk Perception 16

1.3.1, Definition of Risk Perception 16

1.3.2,The importance of Risk perception 17

1.3.3,The Impact of Risk Perception Toward Portfolio Diversification 18

1.4, Literature review 19

1.4.1, Topic-Equivalent Studies in the globe 19

1.4.2, Equivalent Studies in Viet Nam 20

Chapter 2: Research Methodology and Hypothesis Development 20

2.1, Methodology 20

2.2, Hypothesis Development 21

2.2.1, Financial Knowledge, with Risk Perception and Portfolio Diversification

21

2.2.2, Financial Attitude with Risk Perception and Portfolio Diversification 22 2.2.3, Financial Behavior with Risk Perception and Portfolio Diversification 23

2.2.4, Risk Perception and Portfolio Diversification 24

2.3, Variables 25

2.3.1, Independent Variable 25

2.3.2, Dependent Variables 26

2.3.3, Mediating Variable 27

2.4, Research Model 28

Chapter 3: Results Analysis and Discussion 28

3.1, Descriptive Analytics 28

3.2, Results Analysis 30

3.2, Discussion 33

Chapter 4: Conclusion and Recommendation 35

4.1, Current Reality in Vietnam regarding Financial Literacy and portfolio diversification 35

4.2, Recommendations 36

4.2.1, Recommendations for Investors 36

4.2.2, Recommendations for Authorities 37

References 39

Appendix 44

List of Tables

List of Figures

Figure 2: Diversification Level in Investment Portfolio 30

List of acronyms

Heterotrait – Monotrait ratio HTMT

PROLOGUE

1 The urgency of the subject

Currently, with the continuous development of the economy alongside the explosion of the financial market and financial assets at warp speed, typically stocks, bonds, etc This, indeed, has led to unprecedentedly increasing demand for individuals, especially youth, to make necessary investments in assets in an effort to reinforce their personal finance, and hence combat against inflationary pressure that potentially erodes their wealth overtime In particular, in Vietnam, young people, especially individuals belonging to Generation Z (1996-2012), now tend to pay more and more diligent attention toward investment-related activities when 85% of them are certified to have engaged in investment activities before the age of 22 (Duc, 2022) However, regardless

of the increasing awareness subject to investment among youths, there is still a common phenomenon existing among investors, especially new investors, in which they often face difficulty coping with the complexity of financial instruments alongside lacking the necessary understanding regarding investment assets that can potentially put them in the verge of default, hence, might lead to serious financial consequences not only for individuals, but also for organizations and the economy As a result, the financial literacy

is prerequisite for successful investors that bring forward capability in maximizing investment profits and minimizing risks through different investment strategies suitable for their risk-appetite, which is then beneficial to reinforce the long-term individuals’ personal wealth that, in hand ultimately devote to the dynamic growth of economic status in the modern society Above all, the research articles revolve around financial literacy and its impact on portfolio diversification are still few in Vietnam, especially for the GenZ generation Besides that, this research also proposes the incorporation of additional variables of risk perception of investors as a mediator between two traditional relationships between financial literacy and portfolio diversification since the differences in terms of risk appetite discrepancy among investors Therefore, the research is conducted to fill in the gap of previous research as well as propose new aspects of risk perception incorporated in examining its effect toward relationship

toward financial literacy and portfolio diversification, which hence bring forward new perspectives regarding investment decision of investors, especially Gen Z investors

2 The objectives of research (Lan)

The research aims to identify the relationship of financial literacy and portfolio diversification in Vietnam which hence clarify the general phenomena existing among youth regarding their investment-related activities, thereby providing appropriate implications for overcoming constraints faced by the investors in Gen Z in making optimal decisions for effective investment in the Vietnamese stock market It is needed for investors to make necessary investment

Indeed, this research will predominantly focus on certifying the relationship between financial literacy and portfolio diversification through clarifying the relationship of different measurements of financial literacy and portfolio diversification, namely the financial behavior, financial attitude and financial knowledge of the investors, namely Gen Z in Vietnam Besides that, this research, additionally incorporate the variable of risk perception in order to certify the relationship of two variables of financial literacy and portfolio diversification affected the risk perception of different investors, which hence serve as the mediator between these two variables

Through examining eligibility of the above factors in determining the relationship of financial literacy variables and portfolio diversification with the mediating role of risk perception, which is specialized in Gen Z investors in Vietnam The paper, hence, after that, will propose a number of solutions, first for Gen Z itself, which is beneficial to increase the level of understanding regarding personal finance among young people in enhancing the effective investment, from that reinforcing their financial literacy among Gen Z investors In addition, researchers also propose a number

of government-level solutions, which revolve around disseminating and promoting information, which then reinforces the current state of financial literacy of Gen Z regarding the role of risk and return of the investments, hence significantly contribute

to the personal health among Vietnamese youth

3 Subjects and scope of research

The research focus on examining the relationship between financial literacy and portfolio diversification, concentrating on Gen Z investors in Vietnam as a research target Indeed, Gen Z exhibits a range of notable traits, in which they are notably more financially conservative than older generation counterparts and are willing to take personal risks if the potential rewards are significant (Carter, 2018) They excel at finding ways to make money through technology and practical efforts (Swanzen, 2018), which then make them suitable for being a research target in this research

The research is conducted based on the survey allocated to wide range of investors GenZ through sending out via email, QR Code focusing within the scope is Vietnam in order to ensure the feasibility of the research

4 Research Methodology (Lan)

There are two basic research methods including quantitative and qualitative methods Indeed, Quantitative methods commonly involve using standardized questionnaires, often distributed through random sampling techniques to individuals or households (Dudwick et al, 2006) On the other hand, Qualitative research initiates their work with introspection and contemplation regarding their own place within a social historical framework This methodology does not limit itself to a particular question but rather delves into the theoretical and philosophical paradigms with curiosity and openness, adopting a perspective that evolves throughout the research process (Neuman, 2006) Additionally, qualitative techniques usually encompass various methods for collecting and analyzing data, which involve purposive sampling and semi-structured, open-ended interviews (Dudwick et al, 2006)

The research is conducted based on the data collected from the quantitative survey from suitable respondents, in which focus on allocating the survey following snowball sampling, which is beneficial to enhance the efficiency in collecting the data Because the quantitative survey method offers two notable benefits Firstly, it enables quick administration and evaluation(Neuman, 2006) There is no requirement to invest time at the organization beforehand, and responses can be swiftly tabulated (Neuman, 2006) Secondly, the numerical data gathered through this method enables comparisons among organizations or groups and facilitates the assessment of consensus or disparity

among respondents (Neuman, 2006) The advantage of valid quantitative data, obtained through rigorous collection methods and critical analysis, lies in its reliability (ACAPS, 2012)

The study will employ the PLS-SEM model using SmartPLS4 to conduct a comprehensive analysis aimed at assessing the reliability and significance of data input The PLS-SEM model will be executed to elucidate the significance of relationship between variables, encompassing both direct and indirect associations, thus providing a foundation for enhancing transparency and establishing links between disparate hypotheses in the study

5 Research Structure

After outlining the urgency of this research, the below section will be presented transparently in a sensible way following the structure of this research Specifically, the research has four main chapters in total with each chapter having different characteristics The research initiated with Chapter 1, which revolved around analysis related to different variables within the research regarding its definition, role and importance Besides Chapter 1, Chapter 2 represents the methodology of research subject to the sampling size alongside the method of analyzing this sampling Moreover, chapter 2 also outlines different hypotheses for meeting the research objectives of finding out the relationships between them Within chapter 3, its part concentrates on analyzing the results tested from the inputs of respondents regarding the reliability and feasibility of the inputs alongside results regarding the reliability of different hypotheses

in this research, as well as making necessary discussion about the result tested Last but not least, Chapter 4 will discuss the current circumstance regarding financial literacy among investors, especially GenZ investors in Vietnam, from making crucial recommendations for tackling available problems faced by investors in terms of financial literacy

Chapter 1: Literature Review and Overview of Financial Literacy, Risk

Perception, and Portfolio Diversification

1.1, Overview of Financial Literacy

Financial literacy has emerged as a critical concept in empowering individuals to navigate the complexities of the financial world which indeed encompasses a multifaceted construct that transcends mere knowledge of financial products and services Specifically, Lusardi & Mitchell (2014), in hand, suggest that financial literacy exerts a significant influence on various financial behaviors, particularly investment decision-making At its foundation, individuals with financial literacy are able to differentiate between fixed and adjustable interest rates, grasp the time value of money and the power of compound interest, and appreciate the importance of diversification in mitigating investment risk (Hastings et al 2013) Additionally, beyond knowledge, financial literacy also underscores the importance of financial skills, which encompass budgeting, debt management, and financial planning This skill empowers individuals with the fundamental foundation of financial literacy to build up and maintain a budget that effectively aligns with their income and expenses, which are devoted to reinforcing individuals’ personal wealth (Marcolin & Abraham, 2006) Financial literacy, indeed,

is beneficial to foster capabilities of developing essential comprehensive financial plans, taking into account short-term and long-term financial goals, including retirement planning (Lusardi & Mitchell, 2015)

Nowadays, there is a growing number of research underscores the significant influence financial literacy exerts on investment choices, which demystifies different related dimensions involved with the financial literacy of individuals impacting their financial decision Specifically, Koenen & Ziegelmeyer (2011) reveal that individuals with lower levels of financial literacy are more susceptible to making poor investment decisions Indeed, this vulnerability can stem from a lack of understanding of risk-return tradeoffs, leading individuals to chase high returns without adequately considering the associated risks, which lead to unfavorable decision harming to their personal wealth that is specified by a deficit in financial literacy can make individuals susceptible to biases and heuristics that can cloud investment judgment Individuals with low financial literacy, in hand, may exhibit overconfidence, leading them to overestimate their

investment skills and make choices that deviate from rational investment principles (Kaiser& Menkhoff, 2017)

Financial literacy, indeed, empowers individuals to make informed investment decisions by fostering a deeper understanding of asset allocation and diversification strategies By understanding the risk profiles of various asset classes (e.g., stocks, bonds, real estate), individuals can construct a diversified portfolio that aligns with their risk tolerance and financial objectives that best suit their needs (Lusardi & Mitchell, 2014)

As a result, financial literacy serves as a cornerstone for informed financial making, in which it equips individuals with the knowledge, skills, and competencies necessary to effectively manage their financial resources, navigate the complexities of the financial marketplace, and make informed investment choices As financial products and technologies continue to evolve, promoting financial literacy through targeted educational initiatives remains paramount in empowering individuals to achieve long-term financial health

decision-1.1.1, Definition of Financial Literacy (Trang)

The concept of financial literacy has significantly gained traction following the unprecedented demand for ensuring the sustainable status of personal wealth among individuals Breitbard & Reynolds (2003) demystify financial literacy as the capability, which facilitates individuals to utilize effectively knowledge and skills for managing their budget at the efficient level suitable for the purpose of reinforcing individuals lifetime personal wealth Additionally, Grohmann (2018) asserts financial literacy encompasses knowledge, financial skills, and integrated capability, which significantly influences the formation of investment decisions Within academic circles, the operationalization of financial literacy encompasses a multifaceted spectrum It can encompass knowledge of various financial products (distinguishing between stocks and bonds or fixed versus adjustable-rate mortgages) and financial concepts (inflation, compound interest, diversification, and credit scores) It can also extend to possessing the necessary mathematical skills (numeracy) to make informed financial decisions and engaging in activities like financial planning (Lusardi & Mitchell, 2014) Indeed, financial literacy radically contributes to the investment decision-making of investors,

in which a lack of financial literacy in investors is likely to result in poor investment

decisions that are detrimental to the wealth of investors (Koenen & Ziegelmeyer, 2011) Besides that, Malekpour, et al, (2021) also claim that financial literacy is a cause of poor investment decisions, in which individuals with low levels of financial literacy are more susceptible to maintaining efficiency at optimizing capital allocation As a result, the lack of financial literacy, hence, is considered to cause the lack of efficiency and affect risk perception in utilizing available resources which indeed might inflate the debt burden in the case of debt financing that is detrimental to the investors’ financial conditions (Perry, 2008; Zorn, et al., 2008)

1.1.2, The Importance of Financial Literacy

Financial literacy, in hand, plays a crucial role in modern life, facilitating individuals and organizations in the way of making optimal, informed decisions regarding financial management Specifically, financial literacy, indeed, is beneficial to enhance their understanding of investors, especially youngsters in terms of financial products and services, which radically contribute to their sustainable financial situations and, hence, reinforce individuals’ wealth (Van Rooij et al., 2011) The Organization for Economic Co-operation and Development (2013) defines financial literacy as a

"combination of awareness, knowledge, skills, attitudes and behaviors necessary to make informed decisions about the use and management of money", which facilitates the investors not only to understand financial concepts but also to translate that understanding into positive financial behaviors Indeed, the benefits of financial literacy are multifaceted, individuals equipped with financial literacy are better equipped to manage debt, retirement plans, and make informed investment decisions (Lusardi & Mitchell, 2014) As a result, Atkinson & Messy (2012) further reinforce that financial literacy is considered a base for fostering responsible financial habits, such as budgeting and saving, that contribute to the long-term financial security of individuals in ensuring their well-being

Indeed, Lusardi & Mitchell (2007) reckon there is a significant relationship between financial literacy toward enhanced personal prosperity, which hence, serves as

a vehicle for resolving poverty in society Additionally, Damayanti et al,.(2018) further demonstrate that financial literacy can be considered financial knowledge, which then enables individuals to increase their effectiveness when making financial decisions

related to savings, consumption, and investing Specifically, financial literacy has a broader impact beyond personal welfare, which is beneficial to promote economic empowerment by facilitating more individual participation in the financial system (Grohmann et al., 2018) Besides that, possessing financial literacy enables individuals

to make well-informed decisions, hence decreasing the likelihood of becoming a target

of financial fraud (Mwathi, 2017) For that reason, the benefits of financial literacy extend beyond individual well-being, which fosters economic empowerment by enabling greater participation in the financial system, hence, markedly contributing to the sustainability of the financial system (Martin et al, 2015)

1.1.3, Financial Literacy Measurements

Financial Attitude (FA)

Ajzen (1991) defines financial attitude as the outcome of a particular making behavior and this attitude can be reinforced through their economic and non-economic beliefs The utilization of financial management such as budgeting, saving, investing, and debt management to produce and retain value through effective decision-making and resource management can be termed a financial attitude (Rajna et al 2011) Indeed, a positive financial attitude is beneficial in encouraging individuals to consider carefully before making financial decisions considering the kinds of investment that optimize the most long-term benefits, hence the resource allocations When individuals have a positive attitude about finances, they are more likely to be interested in understanding and managing their money better (Grable & Lytton, 1998; Kasman et al, 2018) On the contrary, a negative attitude will weaken their financial decision-making, which is, hence detrimental to the efficiency in resource allocation (Shim et al., 2009; Sohn et al 2012)

decision-Financial Behavior (FB)

Financial behavior, besides that, is also considered a fundamental component of financial literacy which revolves around the understanding of how and when people deviate from rational expectations Indeed, human behavior within the financial field related to financial decision-making and money management such as developing appropriate budgeting programs and monitoring them, paying bills promptly, and saving regularly is referred to as financial behavior (Bhushan & Medury, 2014; Kalekye &

Memba, 2015) Besides that, Sari (2017) claims that poor financial behavior will radically result in erroneous financial planning, hence causing distortions in achieving financial well-being Additionally, Sage and Grable (2009) indicate that individuals with lower levels of financial behavior will pose difficulty in making financial decisions as they are unsatisfied with their financial management capabilities On the other hand, Atkinson & Messy (2012) believe that positive financial behavior of individuals such as developing appropriate spending plans and being concerned with financial stability will enhance their level of financial literacy

Financial Knowledge (FK)

Financial knowledge refers to an individual's ability to utilize their knowledge to garner sound financial choices that facilitate efficient investment in financial assets (Sanderson & Le Roux, 2018) Indeed, Abdeldayem (2016) discovered that individuals who possess an essential amount of financial knowledge can gain a greater understanding of vehicles that facilitate savings and investments compared to others Additionally, Al-Tamini and Kalli (2009) illustrate that individuals with financial expertise are inclined to make investment judgments that differ significantly from those without financial understanding, which hence enhances the optimum of the investment

As a result, financial knowledge is considered beneficial to foster financial rationality

in decision-making about building successful investment and savings strategies

1.2, Portfolio Diversification (PD)

1.2.1, Definition of Portfolio Diversification (PD)

Portfolio Diversification is considered a crucial factor for investors investing in the market, which has been defined in a variety of research as a main factor since the birth of Markowitz’s portfolio Diversification (Markowitz, 1952) Specifically, Markowitz (1952) defines portfolio diversification as the collection of different stocks within a portfolio, which ensures the portfolio's optimization and helps achieve the best interest from that diversification Additionally, Flint et al , (2020) also demonstrate portfolio diversification as a well-defined multivariate construction of all underlying stocks in the market, in which a well-diversified portfolio consists of various stocks within the market Specifically, nowadays, the importance of a well-diversified portfolio

is radically accentuated as the main factor for risk budgeting since the unprecedented advent of the financial crisis, in which when the portfolio diversifies to some extent, the associated risk will also decrease as well (Robb & Shape, 2009) Indeed, in the domain

of portfolio diversification, there exists a wide range of measurements subject to measuring the diversification level of a portfolio, and the Herfindahl index is considered the simplest and most widely used one in measuring portfolio diversification As a result, this research will be conducted on the Herfindahl basis to effectively measure and define portfolio diversification

1.2.2, The Importance of portfolio diversification (H)

Portfolio diversification is beneficial for minimizing unexpected risks associated with the investment process (Kirchner & Zunckel, 2011) Specifically, the Diversification of a portfolio, as specified by Markowitz (1952) involves spreading wealth across a range of assets, which hence, strikes up an advantageous edge for investors to utilize Indeed, its advantage lies in reducing risk, thereby lowering both the likelihood and severity of portfolio loss, in which these strategies of diversification are considered to operate as a multilayered insurance policy, which serves as a base for investors to hedge against the loss of one asset through offsetting by the gain of other assets in the same portfolio (Cumova & Nawrocki, 2014) As a result, by dispersing assets across multiple investment products, investors now are able to mitigate risks associated with certain markets, entities, or industries by offsetting through the gain in other assets (Yahaya et al , 2011)

In addition, portfolio diversification plays an important role in protecting the portfolio from unwanted market fluctuations Boateng et al,.… (2022) have shown that when a portfolio is dispersed across multiple asset classes Indeed, these authors indeed demonstrate diversification as a tool for facilitating the investors in approaching the investment with a reduced amount of associated unsystematic risk ignoring the systematic risk, which is beneficial to the opportunity of getting a higher level of income while a lower level of associated risk, which serve as a base for fostering the stable individuals’ wealth Specifically, diversification serves to limit this risk by balancing the negative performance of one asset class with the positive performance of another,

resulting in a more stable and well-rounded portfolio, hence further reinforcing the financial health of the investors (Markowitz, 1968)

1.2.3, Portfolio Diversification Measurement (Oanh)

There are many ways to measure portfolio diversification, but there are some that are popular and universally applied in different research for demystifying the value of portfolio diversification Specifically, Markowitz (1952), in his Modern portfolio theory (MPT), introduced the mean-variance (MV) approach to address portfolio selection, which quantifies investment return and risk using expected return and variance, respectively The core concept of the MV approach is to maximize expected return while keeping variance constant or minimize variance while keeping expected return constant However, if the market itself is not well diversified this traditional method used in practice provides an imperfect result (Smith, 2006) This tends to be even more so in highly concentrated markets, of which South Africa is such a market The Portfolio Diversification Index (PDI), a relatively new quantitative measure of diversification, evaluates portfolio diversification quantitatively and also overcomes the problem of market influence that other methods encounter (Gopi et al, 2006) PDI allows portfolio managers to compare diversification across different portfolios and/or over different time periods, and determine whether the addition of new securities improves diversification of a particular portfolio and to what extent Additionally, Another approach that aims to provide diversification info on a portfolio uses a correlation matrix

of asset historical returns (Dopfel, 2003) while another method uses a number of cluster analyses (Lhabitant, 2004) These methods are unfortunately not of great use to the investor as not one of them delivers a quantitative measure of portfolio diversification Beside, Yahaya et al., (2011) assert that portfolio diversification, indeed, can be measured by building a diversified portfolio from a pool of assets to allocate appropriate weights to each asset to achieve the right balance between maximum return and minimum risk Indeed, Klemkosky & Martin (1975) emphasize that measuring portfolio diversification is beneficial to segregate the relationship between market risk and excess risk of individual stocks in a portfolio This method, hence, proposes that the individual

risk of different assets within the portfolio may be significantly reduced as the number

of stocks in the portfolio increases (Klemkosky & Martin, 1975)

1,3, Risk Perception

1.3.1, Definition of Risk Perception

Xie, (2007), indeed suggests that risk perception, at the individual level, to the underlying perception of situational ambiguity and uncertainty is related to possible deviations from expected results Financial decisions are correlated with risk factors, especially in buying or selling investments, higher risks come with higher investment returns (Noussair et al., 2014) Therefore, risk perception is considered to be closely tied

to individuals' financial decisions, especially investment decisions because its factor largely contributes to the extent to which individuals are able to optimize investment (Garling et al., 2009) On the other hand, Mallik et al (2017) conclude that risk perception has a significant and positive impact on investment decisions, and higher risk perception will diminish investors' investment in stocks Many investors, indeed, are susceptible to behavioral biases and cognitive errors and hence, may lead to choosing suboptimal investment options (Bhatia et al., 2020) Indeed, differences between individuals' investment decisions may be due to differences in individual perceptions of risk that result from making those decisions (Rand et al., 2011) Therefore, risk perception revolves around the individual's ability to make future predictions about maximizing the optimal level of investment and then minimizing risk to

Related concepts involving different dimensions of investors' psychology revolving around investor confidence, risk aversion, and risk appetite seem to appear when considering the investment environment and investor movements, as stated in Gai and Vausse (2004) Although there are some differences regarding concepts, it indeed generally instills one investor’s awareness, which serves as an indicator of an investor's personal attitude under conditions of uncertainty when making investment Indeed, the investors tend to select the investment decision suitable for their own desire, which is considered under the term of risk appetite that is generally understood as an investor's willingness to accept financial risk with the expectation of earning potential profits Measuring risk tolerance at any given time is crucial for financial stability, as sudden

increases in risk premiums, decreases in market liquidity, and sharp declines in asset prices are often associated with the loss of risk tolerance (Maraval, 2017)

1.3.2,The importance of Risk perception

Risk perception plays an important role in the investment decision-making process, influencing investors' choices based on their understanding and perception of the risk level of investment options Different Valev et al., (2009) demonstrate that when deciding to invest, investors often react strongly to the level of risk, especially in the context of capital loss or unwanted fluctuations, in which most individual investors make different investment decisions but it depends on their level of risk perception towards risk (Hallahan et al., 2004) Investor decision-making behavior is perhaps most influenced by attitudes toward risk (Weber et al., 1998) Specifically, investors with higher risk propensity perceive risky situations as low risk and they tend to take higher risks than people with low-risk propensity (Sitkin & Weingart, 1995)

Indeed, risk perception can be shaped by investors' personal emotions and psychological factors (Rajna et al., 2011; Slovic, 2000) Risk perception can also be influenced by how investment options are presented and how information is organized and communicated, so is considered an important tool to help investors better understand the risk level of asset types and determine the appropriate investment strategy for their desired goals (Abdeldayem, 2015) As a result, risk perception is not only considered for a subjective aspect of risk assessment but also reflects an understanding of risk tolerance and the importance of psychological factors

1.3.3,The Impact of Risk Perception Toward Portfolio Diversification

Risk perception, indeed, is beneficial to facilitate shaping investment decisions,

in which the investors with different risk perceptions will make varying choices regarding their portfolios In terms of personal characteristics such as age, young investors are considered more likely to take better risks, and expect higher returns over longer periods while older investors may prefer capital conservation and be more fearful

of risk (Barber & Odean, 2001) These differences are inclined toward avoidance or acceptance of best investment alternatives and are based on perceived risk (Riaz & Hunjra, 2015) In addition, investors who are successful in managing risks have a

tendency of being more confident and more likely to take risks (Shefrin, 2015) while individuals who tend to avoid natural risks will perceive investment opportunities with greater skepticism (Barsky et al., 2003) Besides that, investors with a higher risk awareness strongly believe that they tend to diversify their portfolios over different assets with different levels of risk, which is optimal in minimizing potential losses by reducing the overall portfolio risk (Boateng, ect…, 2022) Hence, by considering the levels of individual risk acceptance and the risks associated with different investment options, investors could be able to make informed decisions that fit their financial goals

1.4, Literature review

1.4.1, Topic-Equivalent Studies in the global (Trang)

A growing body of research across the globe underscores the significant link between financial literacy and portfolio diversification practices Studies by Lusardi & Mitchell (2014) paint a concerning picture, revealing a global trend of low financial literacy levels, in which they demonstrate that knowledge gaps can impede individuals' ability to grasp diversification strategies and their benefits Conversely, Research conducted by Grable & Lusardi (2010) suggest that financially literate individuals are more inclined to comprehend the risk-return trade-off and appreciate the importance of diversification in mitigating portfolio risk This translates to real-world behavior, with studies like that of Agarwal et al (2015) in India demonstrating a strong correlation between financial literacy and portfolio diversification Similar positive correlations have been documented in Europe by Van Rooij et al (2011) and in the Middle East by Mathew & Mirza (2014)

Indeed, Financial literacy emerges as a critical driver of portfolio diversification practices around the world Research consistently demonstrates a positive association, with financially literate individuals exhibiting a greater propensity to diversify their investments However, there is still a lack of research that delves into the potential mediating role of risk perception in the relationship between financial literacy and portfolio diversification since risk perception acts as a potential mediator in this relationship, highlighting the importance of not only financial knowledge but also informed risk tolerance for effective portfolio construction Specifically, Hsu et al,

(2016) suggest that financial literacy fosters a more informed perception of investment risk, which heightens the awareness of individuals in assessing their risk tolerance, a crucial factor influencing portfolio allocation decisions Additionally, Grable and Lusardi (2010) further indicate that a financially literate investor who perceives himself

as risk-averse is more likely to utilize a diversified portfolio to manage potential losses Conversely, limited financial literacy can lead to a misperception of risk, potentially hindering individuals from adopting diversification strategies Hence, this research is conducted to fill in the gap of previous research

1.4.2, Equivalent Studies in Viet Nam (Trang)

Financial knowledge is considered to play a key role in promoting portfolio diversification practices in Viet Nam, however, the lack of financial knowledge is a major barrier to effectively applying this strategy Many studies by Vietnamese scholars point out the worrying situation about people's level of financial knowledge Research

by Sang (2017) shows that more than 70% of Vietnamese people have no knowledge or limited knowledge about finance, including the concepts of investment and risk management This knowledge gap can hinder their ability to grasp the benefits of portfolio diversification and effectively apply this strategy to their portfolio Research

by Yen (2017) highlights that a significant portion of Vietnamese students in higher education demonstrate a limited understanding of financial concepts, including investment and risk management This knowledge gap can impede individuals' ability

to grasp the benefits of diversification and implement it effectively in their portfolios as Financially literate individuals are more likely to understand the risk-return trade-off and appreciate diversification's role in mitigating portfolio risk This study addresses an existing research gap by investigating the association between financial knowledge and portfolio diversification strategies in Vietnam The findings indicate that financial knowledge is an important factor in promoting portfolio diversification practices, and that financial education programmes can help improve the financial knowledge of people, particularly those in the target group Gen Z, and encourage them to use more effective investment strategies

Chapter 2: Research Methodology and Hypothesis Development

The optimal samples are calculated utilizing Cochran’s formula, which is normally used to figure out the optimal number of observations in some research The formula takes the number of investors in the VietNam stock market representing N with approximately 7.5 million investors The formula takes a 95% confidence level (Z=1.96), with p and q are estimated at 0.5 and 0.5 (for male and female respondents) and d= 0.05 (desired error)

N= 𝑁𝑍²𝑝𝑞

𝑑²(𝑁−1)+ 𝑍²𝑝𝑞= 7500000 𝑥 1.96

2 𝑥 0.5 𝑥 0.5 0.052𝑥 (7500000−1)+1.962 𝑥 0.5 𝑥 0.5= 384

The questionnaires are related to each variable, which is needed to run the analysis subject to the relationship between independent and dependent variables The research, so far, has received a total of 402 responses, and 384 responses will be selected serving as a base for analyzing and ensuring the validity of the research via filtering out unnecessary bias, from that ensure the validity of the analysis results For further analysis We compared the demographic characteristics of respondents (age, gender, and income level) with data from available GenZ investors and found no significant

differences, showing minimal deviations when no feedback was given

The research will utilize the PLS-SEM model (Partial Least Square- Structured Equational Model) using SmartPLS 4 for making a comprehensive analysis revolving around examining the reliability and significance of data inputs Specifically, the research will incorporate the Construct reliability and Validity test by carrying out analysis following the main criteria, namely Cronbach’s alpha, Composite Reliability, and Average Value Extracted (AVE), which is needed for ensuring the suitability and appropriateness of inputs, hence, promote the reliability of data within the research

Besides that, the Discriminant Validity is also utilized to examine the differences of constructs within the research subject to the overlapping problems Lately, running the PLS-SEM model to interpret the significance of the relationships between the variables regarding both their direct and indirect association, hence, serving as a base for fostering transparency and linkage of discrepant hypotheses in the research

2.2, Hypothesis Development

2.2.1, Financial Knowledge, with Risk Perception and Portfolio Diversification

Financial knowledge plays a vital role in guiding people through the intricate landscape of investing choices, which serves as a significant tool for effectively portfolio diversification and attaining financial goals Multiple studies regularly demonstrate a strong and meaningful association between financial literacy and the practice of portfolio diversification (Lusardi & Mitchell, 2007; Van Rooij et al., 2011), which illustrates that people who have a crucial foundation in financial knowledge have a more profound comprehension of diverse investment products, including their risk-return characteristics, and the advantages of diversifying their assets across multiple classes This awareness enables individuals to make well-informed choices about the distribution of their assets, guaranteeing that their portfolio is not too dependent on any one asset or industry As a result, individuals are more inclined to adopt diversification, which reduces risk and strengthens the resilience of their portfolio against market swings (Van Rooij et al., 2011) Financial knowledge extends beyond basic theoretical comprehension; it enables people to use their knowledge practically by performing comprehensive research on possible investments, analyzing risk, and making strategic asset allocation decisions By actively engaging with financial information, individuals enhance their diversification efforts, resulting in a more balanced and comprehensive portfolio, which significantly increases their perception of associated risk (Van Rooij et al., 2011) There is an indisputable connection between financial understanding and portfolio diversification By acquiring essential financial knowledge, people empower themselves to make well-informed investment choices, adopt diversification strategies, and eventually construct a strong and resilient portfolio that leads to a more prosperous financial future

H1: Financial Knowledge has a positive association with Portfolio Diversification H1a: Financial Knowledge has a significant impact on Risk perception

H1b: Risk perception has a mediating role between Financial Knowledge and portfolio Diversification

2.2.2, Financial Attitude with Risk Perception and Portfolio Diversification

Financial attitude, as indicated, is defined as the outcome of a particular making behavior that can be reinforced through economic and non-economic beliefs Individuals who possess optimistic financial mindsets, characterized by a willingness to take on high levels of risk and a focus on long-term goals, are more inclined to engage

decision-in portfolio diversification (Balasuriya et al., 2016) Gadecision-indecision-ing decision-insight decision-into one's fdecision-inancial attitudes and making investing selections aligned with personal values and beliefs might enhance one's capacity to attain financial objectives (Lusardi & Mitchell, 2014) Multiple research studies have shown a direct correlation between one's financial attitude and the practice of portfolio diversification Lusardi & Mitchell (2014) demonstrated a positive correlation between investors possessing superior financial knowledge and the presence of more varied portfolios Furthermore, Van Rooij et al., (2011) showed that individuals with a propensity for assuming elevated levels of risk tend to engage in greater portfolio diversification Financial attitudes have an intricate and diverse correlation with portfolio diversification Certain attitudes, such as a willingness to take risks and having a long-term outlook, may promote diversification (Barber & Odean, 2000) Conversely, attitudes like excessive confidence and fear of losses might hinder diversification People need to comprehend the precise financial mindset and its influence on investing decision-making to create a diversified portfolio that aligns with their risk tolerance and financial objectives (Barber & Odean, 2000)

H2: Financial Attitude has a positive association with Portfolio Diversification

H2a: Financial Attitude has a significant impact on Risk Perception

H2b: Risk perception has a mediating role between Financial Attitude and Portfolio Diversification

2.2.3, Financial Behavior with Risk Perception and Portfolio Diversification

The relationship between financial behavior and portfolio diversification is a complex one, with both positive potential influences While navigating the complex world of investments, individual financial behaviors can act as powerful engines driving portfolio diversification Consistent saving, a cornerstone of diversification, empowers individuals to accumulate the resources needed for a diverse portfolio This not only mitigates specific market risks but also unlocks the potential for growth across various avenues (Lusardi & Mitchell, 2007) Additionally, a long-term investment perspective, like a steady gaze toward the distant horizon, helps investors appreciate diversification's benefits and resist the siren call of abandoning their strategy during short-term market squalls (Barber & Odean, 2000) This patience and discipline forge a more resilient portfolio, weathering inevitable market storms Furthermore, informed investment decisions fueled by research and analysis are powerful allies in diversification By actively investigating potential investments and their risk-return profiles, individuals can strategically allocate their capital across various asset classes, reducing dependence

on any single asset (Van Rooij et al., 2011) As a result, financial behavior is not a mere bystander in portfolio diversification; it's the conductor, orchestrating its success through consistent saving, long-term vision, and informed decision-making given the risk perceived By embracing these positive financial habits, individuals can build a robust and resilient portfolio, poised for long-term success and paving the way for a brighter financial future Remember, taking control of your financial behavior is the first step towards a secure and prosperous tomorrow

H3: Financial Behavior has a positive association with Portfolio Diversification H3a: Financial Behavior has a significant impact on Risk Perception

H3b: Risk Perception has a mediating role between Financial Behavior and Portfolio Diversification

2.2.4, Risk Perception and Portfolio Diversification

Risk perception, as described, is considered related to the investor’s judgments, and awareness toward the risk level deriving from the investment decision (Pidgeon, 1998) Specifically, Risk perception is considered part of cognitive bias which indeed is beneficial to shed light on how people interpret the risks which differs from the reality

or expectations (Ainia & Lutfi, 2019) Moreover, higher risk can serve as a powerful incentive to seek financial education, equip investors with the knowledge and tools they need to make informed decisions, learn about the benefits of diversifying portfolios, and develop battles to create diversified portfolios that match their risk-taking capabilities (Barber & Odean, 2001) As a result, Forlani & Mullins (2000) consider risk perception

as the utmost crucial determinant in demystifying individual behaviors in making investment decisions under various circumstances Indeed, individuals with a higher degree of risk perception are more inclined to diversify their investments as well as invest in low-risk assets and vice versa (Aren & Zengin, 2016)

H4: Risk Perception has a positive relationship with Portfolio Diversification

2.3, Variables

Table 1: Variables Measurement

Financial Knowledge Dummy variables, in which

score 1 if the respondents answer true, while score 0 for false, or unknown answer (Testing Understanding about Inflation, Interest, Risk, Long-term

Investment/Savings)

Vieira et al., (2020) Potrich et al., (2016)

Financial Behavior Likert 5 Scale Putra & Wayan (2023)

Nano & Istrofor (2017)

Financial Attitude Likert 5 Scale Vieira et al., (2020)

Portfolio Diversification Herfindalh Index:

HI= 1- ∑𝑛𝑖=1 𝑊𝑖²᠎

Luigi et al., (2008)

Wi: The weight of share over portfolio

Risk Perception Likert 5 scale: Measure Risk

propensity and Risk Aversion

Additionally, Financial Behavior is an important element of financial literacy, besides, is measured by 6 Likert 5 scale questions focused on the participant’s behaviors toward their financial circumstances, and whether they will sacrifice others’ opportunities for investment, which measures whether they are clever in using their financial knowledge to make better financial decisions

Lastly, Financial Attitudes, is also precisely measured by 8 Likert 5 scale questions revolving around the participant’s attitude toward the investment, as well as financial independence, a measure of the investor’s perspective on financial issues, is one of the key elements of financial literacy The measure of financial attitudes is whether investors focus on their financial problems to secure future benefits, if investors have a negative attitude to financial issues related to future security, they are less likely

to be secure for their future Similarly, if investors place greater importance on term aspirations over long-term security, there will be less chance of saving for the future and making long-run financial plans Financial attitudes, focusing on whether investors place sufficient importance on future financial security, involving the

short-avoidance of present prejudices, show investors’ financial attitudes aimed at securing their personal wealth

2.3.2, Dependent Variables

In this research, portfolio diversification is radically defined as the dependent variable, which lingers around the level that individuals are willing to diversify their portfolio contributing to capital’s optimization and efficient allocation that maximizes the benefits of the investors As a result, the Herfindahl Index will act as a measurement for assessing the diversification degree of an investor’s portfolio (Woerheide & Persson, 1993) Herfindahl Index is considered an overarching, weight-based diversification measure, which is defined as:

HI= 1- ∑𝑛𝑖=1 𝑊𝑖2᠎

In this formula, 𝑊𝑖² is considered the squared of the weight for each one of the shares within the portfolio of the investors, in which the level of diversification will be calculated by taking 1 minus 𝑊𝑖² to get the results which lie around 0 to 1 Considerably, the result of 0 means there is no dỉversification, by increasing the number of shares within the portfolio of the investor, the index is going to increase reaching the level of

1 implying the portfolio is over-diversified

2.3.3, Mediating Variable

Besides that, Risk perception, in this research, will be considered a mediating variable focused on questioning people’s judgment, awareness, and propensity toward the level of risk that they are willing to accept for one’s investment decision, which in hand will be measured by 4 Likert 5-scale questions focusing on two main aspects of risk aversion and risk propensity faced by investors

Risk propensity, the intrinsic inclination of investors towards taking risks, or risk aversion, their tendency to avoid risks, often serves as a significant mediating factor in many psychological and behavioral situations It serves as an intermediary between the independent and dependent variables, exerting an impact on the connection between them Financial literacy provides GenZ investors with the necessary knowledge and abilities to make well-informed investment decisions However, their risk propensity ultimately determines their investment behavior Individuals who are cautious about

taking risks and have a strong understanding of financial matters may prefer to invest in conservative options On the other hand, young investors from Generation Z who are more open to taking risks might be more likely to pursue aggressive investment methods Financial literacy serves as the basis for making well-informed decisions, but the willingness to take risks ultimately determines the precise investment choices taken

2.4, Research Model

Figure 1: Research Model

Source: Made by Authors

Figure 1 illustrates a research model that investigates the relationship between measurement variables of financial literacy, which emphasizes its potential direct relationship with the propensity of diversifying investment portfolios among investors Additionally, the presence of risk perception also marks its presence as the mediator between the role of financial literacy and portfolio diversification

Essential components of the research model Financial Attitudes (FA) refer to an individual's beliefs, attitudes, and preferences concerning financial affairs They exert effect over individuals' perception of risk, their investing decision-making, and their financial management Risk Perception (RP) is the evaluation made by an individual regarding the likelihood of experiencing financial losses or gains in relation to an investment It is shaped by multiple elements, such as previous experiences, financial expertise, and willingness to take risks Portfolio diversification, or PD, refers to the practice of distributing investments among different assets in order to minimize the total risk of a portfolio Diversification aids in reducing the effects of unfavorable occurrences on particular asset classes or sectors Financial Knowledge (FK) refers to

an individual's comprehension of financial concepts, investment methods, and market dynamics Increased financial literacy can result in more educated investment choices and improved risk mitigation Financial Behavior (FB) refers to the specific investment decisions and actions taken by an individual The phenomenon is shaped by a confluence

of financial attitudes, perception of risk, diversification of investment holdings, and level of financial education

Financial attitudes can impact risk perception by altering individuals' perspectives on financial risks and their willingness to accept probable losses The perception of risk can impact the diversification of a portfolio, as individuals with greater sensitivity to risk are more likely to diversify in order to decrease their overall exposure to risk Besides that, the both variables of Financial Knowledge (FK) and Financial Behavior (FB), besides Financial Attitudes (FA), also can have potential relationship with portfolio diversification as financial knowledge and financial behavior can be considered driver for the act of diversifying portfolio, which emphasize the investor's preferences for diversifying their portfolio given their understanding regarding the investment alongside behavior for making that investment decíion combined with the mediator role of risk perception As a result, individuals who possess

a pragmatic evaluation of risk and a portfolio that is well-diversified are more inclined

to make logical financial choices and steer clear of impulsive behaviors