An Economic Index of Relative Riskiness

33 Pages Posted: 19 Jan 2012 Last revised: 31 Jan 2012

See all articles by Amnon Schreiber

Amnon Schreiber

Hebrew University of Jerusalem; Bar-Ilan University - Department of Economics

Date Written: January 19, 2012

Abstract

In their seminal works, Arrow (1965) and Pratt (1964) defined two aspects of risk aversion: absolute risk aversion and relative risk aversion. Based on their definitions, we define two aspects of risk: absolute risk and relative risk. We consider situations in which, by making an investment, an agent exchanges a certain amount of wealth w by a random distributed level of wealth rw. In such situations, we define absolute risk as the riskiness of a gamble that is distributed as rw-w, and relative risk as the riskiness of a security that is distributed as rw/w. We measure absolute risk by the Aumann and Serrano (2008) index of riskiness and relative risk by an equivalent index that we develop in this paper. The two concepts of risk do not necessarily agree on which one of two investments is riskier, and hence they capture two different aspects of risk.

Keywords: riskiness, Absolute Risk Aversion, Relative Risk Aversion, gamble, security

Suggested Citation

Schreiber, Amnon, An Economic Index of Relative Riskiness (January 19, 2012). Available at SSRN: https://ssrn.com/abstract=1988211 or http://dx.doi.org/10.2139/ssrn.1988211

Amnon Schreiber (Contact Author)

Hebrew University of Jerusalem ( email )

Mount Scopus
Jerusalem, Jerusalem 91905
Israel

Bar-Ilan University - Department of Economics ( email )

Ramat-Gan, 52900
Israel

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