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Does the More Risk‐Averse Investor hold a Less Risky Portfolio?

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  • GEORGE WONG

Abstract

We study the suitability of using absolute risk aversion as a measure of willingness to take risk in the Arrow–Debreu portfolio framework. We define a global measure of risk for the Arrow–Debreu portfolio, which is measured by the sensitivity of an individual's Arrow–Debreu portfolio payoff to the change in the market return. We call this measure ‘conservatism’ and show that the concept of ‘more conservative’ is stronger than that of ‘more risk‐averse.’ A higher absolute risk aversion is only necessary but not sufficient to induce a less risky Arrow–Debreu portfolio. Our results not only challenge the well‐accepted notion that a more risk‐averse investor holds a less risky portfolio, but also suggest a stronger measure – conservatism – for evaluating the riskiness of portfolio.

Suggested Citation

  • George Wong, 2009. "Does the More Risk‐Averse Investor hold a Less Risky Portfolio?," International Review of Finance, International Review of Finance Ltd., vol. 9(3), pages 319-333, September.
    • Handle: RePEc:bla:irvfin:v:9:y:2009:i:3:p:319-333
    DOI: 10.1111/j.1468-2443.2009.01093.x
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    References listed on IDEAS

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    1. Guenter Franke & Richard Stapleton & Marti Subrahmanyam, 2004. "Background risk and the demand for state-contingent claims," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 23(2), pages 321-335, January.
    2. Rubinstein, Mark, 1974. "An aggregation theorem for securities markets," Journal of Financial Economics, Elsevier, vol. 1(3), pages 225-244, September.
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    Cited by:

    1. Curatola, Giuliano, 2022. "Price impact, strategic interaction and portfolio choice," The North American Journal of Economics and Finance, Elsevier, vol. 59(C).

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