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Risky Assets
5.3 Portfolio Composition, Risk Aversion and Wealth
5.4 Risk Aversion and Risky Portfolio Composition
5.5 Risk Aversion and Saving Behavior
5.6 Key Concepts and Results
Asset Pricing
Chapter V. Risk Aversion and Investment Decisions, Part I
Asset Pricing
5.2 Risk Aversion and Portfolio Allocation; Risk Free vs. Risky Assets
5.3 Portfolio Composition, Risk Aversion and Wealth
5.4 Risk Aversion and Risky Portfolio Composition The Canonical Portfolio Problem
5.5 Risk Aversion and Saving Behavior
5.6 Key Concepts and Results
maxE{U(Y0 − s) + δU(sR̃)},
s (2)
s.t. Y0 ≥ s ≥ 0
Asset Pricing
5.2 Risk Aversion and Portfolio Allocation; Risk Free vs. Risky Assets
5.3 Portfolio Composition, Risk Aversion and Wealth
5.4 Risk Aversion and Risky Portfolio Composition The Canonical Portfolio Problem
5.5 Risk Aversion and Saving Behavior
5.6 Key Concepts and Results
â > 0 ⇔ E r̃ > rf
â = 0 ⇔ E r̃ = rf
â < 0 ⇔ E r̃ < rf
Asset Pricing
5.2 Risk Aversion and Portfolio Allocation; Risk Free vs. Risky Assets
5.3 Portfolio Composition, Risk Aversion and Wealth
5.4 Risk Aversion and Risky Portfolio Composition The Canonical Portfolio Problem
5.5 Risk Aversion and Saving Behavior
5.6 Key Concepts and Results
Asset Pricing
5.2 Risk Aversion and Portfolio Allocation; Risk Free vs. Risky Assets
5.3 Portfolio Composition, Risk Aversion and Wealth
5.4 Risk Aversion and Risky Portfolio Composition The Canonical Portfolio Problem
5.5 Risk Aversion and Saving Behavior
5.6 Key Concepts and Results
U(Y ) = ln Y
a −(1 + rf )[E r̃ − rf ]
= > 0. (6)
Y0 (r1 − rf )(r2 − rf )
Asset Pricing
5.2 Risk Aversion and Portfolio Allocation; Risk Free vs. Risky Assets
5.3 Portfolio Composition, Risk Aversion and Wealth
5.4 Risk Aversion and Risky Portfolio Composition
5.5 Risk Aversion and Saving Behavior
5.6 Key Concepts and Results
Theorem (5.2:)
Suppose, for all wealth levels Y , RA1 (Y ) > RA2 (Y ) where RAi (Y )
is the measure of absolute risk aversion of investor i, i = 1, 2.
Then â1 (Y ) < â2 (Y )
Theorem ( 5.3:)
Suppose, for all wealth levels Y > 0, RR1 (Y ) > RR2 (Y ) where
RRi (Y ) is the measure of relative risk aversion of investor
i, i = 1, 2. Then â1 (Y ) < â2 (Y ).
Asset Pricing
5.2 Risk Aversion and Portfolio Allocation; Risk Free vs. Risky Assets
5.3 Portfolio Composition, Risk Aversion and Wealth
5.4 Risk Aversion and Risky Portfolio Composition
5.5 Risk Aversion and Saving Behavior
5.6 Key Concepts and Results
Asset Pricing
5.2 Risk Aversion and Portfolio Allocation; Risk Free vs. Risky Assets
5.3 Portfolio Composition, Risk Aversion and Wealth
5.4 Risk Aversion and Risky Portfolio Composition
5.5 Risk Aversion and Saving Behavior
5.6 Key Concepts and Results
d â/â Y d â
η(Y , â) = dY /Y = â dY
Asset Pricing
5.2 Risk Aversion and Portfolio Allocation; Risk Free vs. Risky Assets
5.3 Portfolio Composition, Risk Aversion and Wealth
5.4 Risk Aversion and Risky Portfolio Composition
5.5 Risk Aversion and Saving Behavior
5.6 Key Concepts and Results
Asset Pricing
5.2 Risk Aversion and Portfolio Allocation; Risk Free vs. Risky Assets
5.3 Portfolio Composition, Risk Aversion and Wealth
5.4 Risk Aversion and Risky Portfolio Composition
5.5 Risk Aversion and Saving Behavior
5.6 Key Concepts and Results
maxE{U(Y0 − s) + δU(sR̃)},
s (7)
s.t. Y0 ≥ s ≥ 0
Asset Pricing
5.2 Risk Aversion and Portfolio Allocation; Risk Free vs. Risky Assets
5.3 Portfolio Composition, Risk Aversion and Wealth
5.4 Risk Aversion and Risky Portfolio Composition
5.5 Risk Aversion and Saving Behavior
5.6 Key Concepts and Results
−U 000 (c)
P(c) = U 00 (c)
000 (c)
P(c)c = −cUU 00 (c)
Theorem (5.8)
Let R̃A , R̃B be two return distributions such that R̃A SSD R̃B ,
and let sA and sB be, respectively, the savings out of Y0
corresponding to the return distributions R̃A and R̃B . Then,
sA ≥ sB iff c P(c) ≤ 2,
and conversely,
Asset Pricing
5.2 Risk Aversion and Portfolio Allocation; Risk Free vs. Risky Assets
5.3 Portfolio Composition, Risk Aversion and Wealth
5.4 Risk Aversion and Risky Portfolio Composition
5.5 Risk Aversion and Saving Behavior
5.6 Key Concepts and Results
Assume CRRA
Asset Pricing
5.2 Risk Aversion and Portfolio Allocation; Risk Free vs. Risky Assets
5.3 Portfolio Composition, Risk Aversion and Wealth
5.4 Risk Aversion and Risky Portfolio Composition
5.5 Risk Aversion and Saving Behavior
5.6 Key Concepts and Results
Asset Pricing