Properties of risk aversion estimated from portfolio weights

Andrew Grant (), Oh Kang Kwon () and Steve Satchell ()
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Andrew Grant: The University of Sydney
Oh Kang Kwon: The University of Sydney
Steve Satchell: University of Cambridge

Journal of Asset Management, 2024, vol. 25, issue 5, No 1, 427-444

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.

Keywords: Risk aversion; Estimation error; Financial advice; Portfolio weights (search for similar items in EconPapers)
JEL-codes: C13 C58 G11 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1057/s41260-024-00375-y

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