Article1991

MEASURING RISK AVERSION: ALLOCATION, LEVERAGE, AND ACCUMULATION

28 citations0/0 files storedThe Journal of Financial Research

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Decision-Making and Behavioral Economics Financial Markets and Investment Strategies Financial Literacy, Pension, Retirement Analysis

Abstract

Abstract The risk‐asset ratio that measures Arrow‐Pratt relative risk aversion reflects a multidimensional risk behavior. The risk‐asset ratio is decomposed into the product of ratios that measure portfolio allocation between riskless and risk assets, use of financial leverage, and accumulation of wealth in marketable form. The three dimensions are less sensitive to the definition of wealth than is the composite risk‐asset ratio. Constant relative risk aversion can be characterized by offsetting changes in the three dimensions as wealth changes.

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References

1964Risk Aversion in the Small and in the Large 1976Risk Aversion in the Small and in the Large 1966Aspects of the Theory of Risk-Bearing.1977THE DEMAND FOR RISKY ASSETS 1975INDIVIDUAL INVESTOR RISK AVERSION AND INVESTMENT PORTFOLIO COMPOSITION 1983Risk Aversion Revisited 1975The Asset Structure of Individual Portfolios and Some Implications for Utility Functions 1975THE ASSET STRUCTURE OF INDIVIDUAL PORTFOLIOS AND SOME IMPLICATIONS FOR UTILITY FUNCTIONS

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