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Properties of risk aversion estimated from portfolio weights

Author

Listed:
  • Andrew Grant

    (The University of Sydney)

  • Oh Kang Kwon

    (The University of Sydney)

  • Steve Satchell

    (University of Cambridge)

Abstract

While risk tolerance is often elicited using questionnaire-based instruments, in this paper, we evaluate the merits of an inversion-based technique, wherein risk aversion parameters are inferred from an individual’s portfolio holdings and a sequence of realized returns. We obtain expressions for the finite sample and asymptotic variance of the estimated risk aversion parameter under the inversion approach with a single risky asset, demonstrating that confidence intervals for parameter estimates are relatively wide. Extending the analysis, we show that inferring risk aversion from multiple risky assets does not typically serve to reduce the estimated parameter variance, but rather propagates estimation error.

Suggested Citation

  • Andrew Grant & Oh Kang Kwon & Steve Satchell, 2024. "Properties of risk aversion estimated from portfolio weights," Journal of Asset Management, Palgrave Macmillan, vol. 25(5), pages 427-444, September.
  • Handle: RePEc:pal:assmgt:v:25:y:2024:i:5:d:10.1057_s41260-024-00375-y
    DOI: 10.1057/s41260-024-00375-y
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    More about this item

    Keywords

    Risk aversion; Estimation error; Financial advice; Portfolio weights;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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