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Financial Risk Aversion and Household Asset Diversification

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  • Barasinska, Nataliya

    ()
    (DIW Berlin)

  • Schäfer, Dorothea

    (DIW Berlin)

  • Stephan, Andreas

    (CESIS and JIBS)

Abstract

This paper explores the relationship between risk attitude and asset diversifcation in household portfolios. We first examine the impact of manifested risk aversion on the total number of distinct assets held in a portfolio (naive diversification). The second part of the paper focuses on a more sophisticated strategy of diversification and asks whether financial theory is compatible with observed diversification patterns. Based on the German Socioeconomic Panel which provides unique measures of individual propensity for taking risk, the results of the regression analysis show that, along with some socioeconomic characteristics, the propensity for taking investment risk is an important predictor of a household's diversification strategy. However, some of our findings are strongly at odds with what the concept of mean-variance utility suggests.

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Bibliographic Info

Paper provided by Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies in its series Working Paper Series in Economics and Institutions of Innovation with number 137.

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Length: 29 pages
Date of creation: 09 Sep 2008
Date of revision:
Handle: RePEc:hhs:cesisp:0137

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Postal: CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology, SE-100 44 Stockholm, Sweden
Phone: +46 8 790 95 63
Web page: http://www.infra.kth.se/cesis/
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Keywords: household finances; diversification; financial portfolio;

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References

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Cited by:
  1. Andrew C. Worthington, 2009. "Household Asset Portfolio Diversification: Evidence from the Household, Income and Labour Dynamics in Australia (HILDA) Survey," Discussion Papers in Finance finance:200908, Griffith University, Department of Accounting, Finance and Economics.

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