Acceptable Risk in a Portfolio Analysis

Matjaz Steinbacher

MPRA Paper from University Library of Munich, Germany

Abstract: A social network has been used to simulate how agents of different levels of risk aversion under different circumstances behave in financial markets when deciding between risk-free and a risky asset. This is done by a discrete time version evolutionary game of risk-loving and risk-averse agents. The evolutionary process takes place on a social network through which investors acquire information they need to choose the strategy. A significant feature of the paper is that first-order stochastic dominance is a key determinant of the decision-making, while second-order stochastic dominance is not, with the level of omniscience and preferences of agents also having a significant role. Under most of the circumstances, pure risk-aversion turns out to be dominated strategy, while pure risk-taking “almost” dominant.

Keywords: social networks; portfolio analysis; stochastic finance; stochastic dominance (search for similar items in EconPapers)
JEL-codes: C73 G11 Z13 (search for similar items in EconPapers)
Date: 2009
New Economics Papers: this item is included in nep-net and nep-upt
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