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On The Shape Of Risk Aversion And Asset Allocation

Author

Listed:
  • PIERRE SIX

    (Finance Department, Neoma Business School, 1 rue du Maréchal Juin, 76825 Mont Saint Aignan, Cedex, France)

Abstract

This paper demonstrates the simple incorporation of any shape of risk aversion into an asset allocation framework. Indeed, the relevant literature about risk aversion shows mixed evidence regarding the shape of this important but subjective variable. Our setting builds on, and can be compared with, the well-known constant relative risk aversion (CRRA) framework and mostly preserves the tractability of the affine-CRRA framework. Our numerical analysis exhibits some link between measures of risk aversions and empirical studies of asset allocation.

Suggested Citation

  • Pierre Six, 2014. "On The Shape Of Risk Aversion And Asset Allocation," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 17(08), pages 1-27.
    • Handle: RePEc:wsi:ijtafx:v:17:y:2014:i:08:n:s021902491450054x
    DOI: 10.1142/S021902491450054X
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    More about this item

    Keywords

    Risk aversion; asset allocation; mean-reversion; wealth; options; G11;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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