Volatility Inadaptability: Investors Care About Risk, But Can't Cope with Volatility

Review of Finance (Forthcoming)

50 Pages Posted: 13 Oct 2011 Last revised: 12 Jun 2013

Christian Ehm

University of Mannheim - Department of Banking and Finance

Christine Laudenbach

Goethe University Frankfurt

Martin Weber

University of Mannheim - Department of Banking and Finance

Date Written: June 9, 2013

Abstract

This paper investigates two research questions: Do investors see a relationship between risk attitude and the amount invested risky? Further, do investors adjust their investments if provided with assets with different volatilities? In an experimental study, investors allocate an amount between a risky and a risk-free asset. Investors' risk attitude predicts risk taking. Investors are, however, unable to adapt to risky assets with different volatilities; they choose almost the same allocation to the risky asset independently of its volatility, thus amassing significantly different portfolios.

Keywords: portfolio choice, portfolio selection, risk-taking, volatility, volatility inadaptability

JEL Classification: G11

Suggested Citation

Ehm, Christian and Laudenbach, Christine and Weber, Martin, Volatility Inadaptability: Investors Care About Risk, But Can't Cope with Volatility (June 9, 2013). Review of Finance (Forthcoming). Available at SSRN: https://ssrn.com/abstract=1942440 or http://dx.doi.org/10.2139/ssrn.1942440

Christian Ehm (Contact Author)

University of Mannheim - Department of Banking and Finance ( email )

L5, 2
Mannheim, 68131
Germany

Christine Laudenbach

Goethe University Frankfurt ( email )

Gr├╝neburgplatz 1
Frankfurt, 60323
Germany

Martin Weber

University of Mannheim - Department of Banking and Finance ( email )

D-68131 Mannheim
Germany
+49 621 181 1532 (Phone)
+49 621 181 1534 (Fax)

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