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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.

Suggested Citation

  • Dorn, Daniel & Huberman, Gur, 2010. "Preferred risk habitat of individual investors," Journal of Financial Economics, Elsevier, vol. 97(1), pages 155-173, July.
  • Handle: RePEc:eee:jfinec:v:97:y:2010:i:1:p:155-173
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    More about this item

    Keywords

    Empirical portfolio choice Risk aversion Narrow framing;

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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