Increasing Return Response to Changes in Risk
33 Pages Posted: 24 Oct 2017 Last revised: 18 Jan 2018
Date Written: January 18, 2018
Risk aversion theory is based on individuals’ choice among risky assets with expected utility in its foundation. It is about investor behavior (i.e. investor choice), under normal circumstances, towards assets with various levels of risk. A positive and marginally diminishing relationship between risk and return exists. This study is about investor behavior as it relates to their response (not choice) to risk. We present an argument and supporting evidence that investors’ return response to risk is increasing in level of risk. Thus, investor behavior is subject to change and level of risk is a determinant of such change. We also explain the negative time-series correlation between risk and return.
Keywords: investor behavior, risk aversion, risk response
JEL Classification: G12, G14, G41
Suggested Citation: Suggested Citation