Equivalent Risky Allocation: The New ERA of Risk Measurement for Heterogeneous Investors

Séverine  Plunus; Roland  Gillet; Georges  Hübner

doi:10.4236/ajibm.2015.56035

Séverine Plunus¹^*, Roland Gillet^2,3, Georges Hübner^4,5,6

Abstract: This paper introduces an investor-specific risk measure derived from the linear-exponential (linex) utility function. It combines the notions of risk perception and risk aversion. To make this measure interpretable and comparable with others like variance or value-at-risk, it is translated into an Equivalent Risky Allocation (ERA), where the risk value is matched with the one of a selected benchmark. We demonstrate that portfolio allocations are sensitive to risk perception. The linex risk measure provides more stable allocations and is closer to the target risk profile than the variance, while it provides better consistency of risk exposures over time than the value-at-risk.

Keywords: Utility Function, Risk Perception, Risk Aversion, Portfolio Allocation, Risk Profile

Cite this paper: Plunus, S. , Gillet, R. , Hübner, G. , (2015) Equivalent Risky Allocation: The New ERA of Risk Measurement for Heterogeneous Investors. American Journal of Industrial and Business Management, 5, 351-365. doi: 10.4236/ajibm.2015.56035.

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