Asset Allocation and Individual Risk Aversion

Portfolio theory assumes that investors are rational, utility-maximizing individuals who exhibit differing degrees of relative risk aversion, depending on such factors as age, wealth, income and education.1 Previous studies have employed a variety of approaches to infer individual risk preferences from the proportion of an individual's total wealth allocated to risky assets.2 Some of these researchers used questionnaires designed to elicit from individuals explicit answers about their risk preferences; others examined individuals' actual asset allocation decisions.