IDEAS home Printed from https://ideas.repec.org/a/kap/jrisku/v24y2002i3p195-212.html
   My bibliography  Save this article

Horizon Length and Portfolio Risk

Author

Listed:
  • Gollier, Christian
  • Zeckhauser, Richard J

Abstract

In this paper, we compare the attitude towards current risk of two expected-utility-maximizing investors who are identical except that the first investor will live longer than the second one. It is often suggested that the young investor should take more risks than the old investor. We consider as a benchmark the case of complete markets with a zero risk-free rate. We show that a necessary and sufficient condition to assure that younger is riskier is that the Arrow-Pratt index of absolute tolerance (T) be convex. If we allow for a positive risk-free rate, the necessary and sufficient condition is T convex, plus T(0) = 0. It extends the well-known result that rational investors can behave myopically if and only if the utility function exhibits constant relative risk aversion. Copyright 2002 by Kluwer Academic Publishers

Suggested Citation

  • Gollier, Christian & Zeckhauser, Richard J, 2002. "Horizon Length and Portfolio Risk," Journal of Risk and Uncertainty, Springer, vol. 24(3), pages 195-212, May.
    • Handle: RePEc:kap:jrisku:v:24:y:2002:i:3:p:195-212
    as

    Download full text from publisher

    File URL: http://journals.kluweronline.com/issn/0895-5646/contents
    File Function: link to full text
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Kimball, Miles S, 1990. "Precautionary Saving in the Small and in the Large," Econometrica, Econometric Society, vol. 58(1), pages 53-73, January.
    2. Cox, John C. & Leland, Hayne E., 2000. "On dynamic investment strategies," Journal of Economic Dynamics and Control, Elsevier, vol. 24(11-12), pages 1859-1880, October.
    3. Gollier, Christian & Lindsey, John & Zeckhauser, Richard J., 1997. "Investment Flexibility and the Acceptance of Risk," Journal of Economic Theory, Elsevier, vol. 76(2), pages 219-241, October.
    4. Guiso, Luigi & Jappelli, Tullio & Terlizzese, Daniele, 1996. "Income Risk, Borrowing Constraints, and Portfolio Choice," American Economic Review, American Economic Association, vol. 86(1), pages 158-172, March.
    5. Bodie, Zvi & Merton, Robert C. & Samuelson, William F., 1992. "Labor supply flexibility and portfolio choice in a life cycle model," Journal of Economic Dynamics and Control, Elsevier, vol. 16(3-4), pages 427-449.
    6. Dybvig, Philip H & Lippman, Steven A, 1983. "An Alternative Characterization of Decreasing Absolute Risk Aversion," Econometrica, Econometric Society, vol. 51(1), pages 223-224, January.
    7. Pratt, John W & Zeckhauser, Richard J, 1987. "Proper Risk Aversion," Econometrica, Econometric Society, vol. 55(1), pages 143-154, January.
    8. Kessler, Denis & Wolff, Edward N, 1991. "A Comparative Analysis of Household Wealth Patterns in France and the United States," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 37(3), pages 249-266, September.
    9. Kimball, Miles S, 1993. "Standard Risk Aversion," Econometrica, Econometric Society, vol. 61(3), pages 589-611, May.
    10. Merton, Robert C, 1969. "Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 247-257, August.
    11. He Hua & Huang Chi-fu, 1994. "Consumption-Portfolio Policies: An Inverse Optimal Problem," Journal of Economic Theory, Elsevier, vol. 62(2), pages 257-293, April.
    Full references (including those not matched with items on IDEAS)

    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:jrisku:v:24:y:2002:i:3:p:195-212. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sonal Shukla) or (Rebekah McClure). General contact details of provider: http://www.springer.com .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.