Properties of risk aversion estimated from portfolio weights

Abstract While risk tolerance is often elicited using questionnaire-based instruments, in this paper, we evaluate the merits of an inversion-based technique, wherein risk aversion parameters are inferred from an individual’s portfolio holdings and a sequence of realized returns. We obtain expressions for the finite sample and asymptotic variance of the estimated risk aversion parameter under the inversion approach with a single risky asset, demonstrating that confidence intervals for parameter estimates are relatively wide. Extending the analysis, we show that inferring risk aversion from multiple risky assets does not typically serve to reduce the estimated parameter variance, but rather propagates estimation error.

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Publication Details

Journal
Journal of Asset Management
Published
2024-09-01
DOI
https://doi.org/10.1057/s41260-024-00375-y
Citations
2
Primary Topic
Risk and Portfolio Optimization
Type
article
Field-Weighted Citation Impact
0.98
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article

Properties of risk aversion estimated from portfolio weights

Stephen Satchell, Andrew Grant, Oh Kang Kwon
2 citations
Journal of Asset Management
Risk and Portfolio Optimization
0.98
article

Properties of risk aversion estimated from portfolio weights

Stephen Satchell, Andrew Grant, Oh Kang Kwon
article en
2 citations

Abstract

Abstract While risk tolerance is often elicited using questionnaire-based instruments, in this paper, we evaluate the merits of an inversion-based technique, wherein risk aversion parameters are inferred from an individual’s portfolio holdings and a sequence of realized returns. We obtain expressions for the finite sample and asymptotic variance of the estimated risk aversion parameter under the inversion approach with a single risky asset, demonstrating that confidence intervals for parameter estimates are relatively wide. Extending the analysis, we show that inferring risk aversion from multiple risky assets does not typically serve to reduce the estimated parameter variance, but rather propagates estimation error.

Journal of Asset ManagementVol. 25(5)
The University of Sydney (AU), University of Cambridge (GB)
Openalex Percentile: Top 21%
Risk and Portfolio Optimization
0.98
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