Preferred Risk Habitat of Individual Investors

Gur Huberman and Daniel Dorn

No 6532, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The preferred risk habitat hypothesis, introduced here, is that individual investors select stocks with volatilities commensurate with their risk aversion; more risk-averse individuals pick lower-volatility stocks. The investors' portfolio perspective overlooks return correlations. The data, 1995-2000 holdings of over 20,000 customers of a German broker, are consistent with the predictions of the hypothesis: the portfolios contain highly similar stocks in terms of volatility, when stocks are sold they are replaced by stocks of similar volatilities, and the more risk averse customers indeed hold less volatile stocks. Cross-sectionally, the more risk averse investors also have a stronger tendency to invest in mutual funds. Major improvements in diversification are concentrated during periods when investors add money to their account.

Keywords: Preferred risk habitat; Risk; Risk aversion; Stock portfolio; Volatility (search for similar items in EconPapers)
JEL-codes: G10 (search for similar items in EconPapers)
Date: 2007-10
New Economics Papers: this item is included in nep-cfn, nep-rmg and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Journal Article: Preferred risk habitat of individual investors (2010)
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