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Increasing return response to changes in risk

Mehmet F. Dicle

Review of Financial Economics, 2019, vol. 37, issue 1, 197-215

Abstract: Risk aversion theory is based on an individual's choice among risky assets with expected utility in its foundation. It is about investor behavior (i.e., investor choice), under normal circumstances, toward assets with various levels of risk. A positive and marginally diminishing relationship between risk and return exists. This study is about investor behavior related to their response (not choice) to risk. We present an argument and supporting evidence that investors’ return response to risk is increasing with the level of risk. Thus, investor behavior is subject to change and the level of risk is a determinant of such change. We also explain the negative time‐series correlation between risk and return.

Date: 2019
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Citations: View citations in EconPapers (2)

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https://doi.org/10.1002/rfe.1032

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