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Acceptable Risk in a Portfolio Analysis

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  • Steinbacher, Matjaz

Abstract

A social network has been used to simulate how agents of different levels of risk aversion under different circumstances behave in financial markets when deciding between risk-free and a risky asset. This is done by a discrete time version evolutionary game of risk-loving and risk-averse agents. The evolutionary process takes place on a social network through which investors acquire information they need to choose the strategy. A significant feature of the paper is that first-order stochastic dominance is a key determinant of the decision-making, while second-order stochastic dominance is not, with the level of omniscience and preferences of agents also having a significant role. Under most of the circumstances, pure risk-aversion turns out to be dominated strategy, while pure risk-taking “almost” dominant.

Suggested Citation

  • Steinbacher, Matjaz, 2009. "Acceptable Risk in a Portfolio Analysis," MPRA Paper 13569, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:13569
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    References listed on IDEAS

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    More about this item

    Keywords

    social networks; portfolio analysis; stochastic finance; stochastic dominance;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • Z13 - Other Special Topics - - Cultural Economics - - - Economic Sociology; Economic Anthropology; Language; Social and Economic Stratification
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games

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