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Preferred risk habitat of individual investors

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  • Dorn, Daniel
  • Huberman, Gur

Abstract

The preferred risk habitat hypothesis, introduced here, is that individual investors select stocks whose volatilities are commensurate with their risk aversion. The data, 1995-2000 holdings of over 20,000 clients at a large German broker, are consistent with the predictions of the hypothesis: the returns of stocks within each portfolio have remarkably similar volatilities, when stocks are sold they are replaced by stocks of similar volatilities, and the more risk-averse customers indeed hold less volatile stocks. Greater volatility specialization is associated with lower Sharpe ratios, primarily because more specialized investors hold fewer stocks and thereby expose themselves to more unsystematic risk.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 97 (2010)
Issue (Month): 1 (July)
Pages: 155-173

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Handle: RePEc:eee:jfinec:v:97:y:2010:i:1:p:155-173

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Web page: http://www.elsevier.com/locate/inca/505576

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Keywords: Empirical portfolio choice Risk aversion Narrow framing;

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References

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Citations

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Cited by:
  1. Bartram, Sohnke M. & Griffin, John & Ng, David, 2010. "How Important Are Foreign Ownership Linkages for International Stock Returns?," Working Papers 10-21, University of Pennsylvania, Wharton School, Weiss Center.
  2. Hsu, Yuan-Lin & Chow, Edward H., 2013. "The house money effect on investment risk taking: Evidence from Taiwan," Pacific-Basin Finance Journal, Elsevier, vol. 21(1), pages 1102-1115.
  3. Anja Koebrich Leon & Christian Pfeifer, 2013. "Religious Activity, Risk Taking Preferences, and Financial Behaviour: Empirical Evidence from German Survey Data," Working Paper Series in Economics 269, University of L√ľneburg, Institute of Economics.
  4. Ann Yang, 2013. "Decision Making for Individual Investors: A Measurement of Latent Difficulties," Journal of Financial Services Research, Springer, vol. 44(3), pages 303-329, December.

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