Increasing Risk Aversion and Life-Cycle Investing
28 Pages Posted: 4 Apr 2015 Last revised: 27 Jul 2017
Date Written: April 11, 2016
We derive the optimal portfolio for an investor with increasing relative risk aversion in a complete continuous-time securities market. The IRRA assumption helps to mitigate the criticism of constant relative risk aversion that it implies an unreasonably large aversion to large gambles, given reasonable aversion to small gambles. The model provides theoretical support for the common recommendation of financial advisors that older investors should reduce their allocations to risky assets, and it is consistent with empirical findings on the relations between age, wealth, and portfolios.
Keywords: Risk Aversion, Portfolio Choice
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