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Financial Risk Aversion and Household Asset Diversification

  • Nataliya Barasinska
  • Dorothea Schäfer
  • Andreas Stephan

This paper explores the relationship between risk attitude and asset diversification 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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Paper provided by DIW Berlin, The German Socio-Economic Panel (SOEP) in its series SOEPpapers on Multidisciplinary Panel Data Research with number 117.

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Length: 28 p.
Date of creation: 2008
Date of revision:
Handle: RePEc:diw:diwsop:diw_sp117
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  17. Arie Kapteyn & Federica Teppa, 2002. "Subjective Measures of Risk Aversion and Portfolio Choice," Working Papers 02-03, RAND Corporation Publications Department.
  18. Alessie, R.J.M. & Hochgürtel, S. & van Soest, A.H.O., 2000. "Household Portfolios in the Netherlands," Discussion Paper 2000-55, Tilburg University, Center for Economic Research.
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