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Increasing Return Response to Changes in Risk

33 Pages Posted: 24 Oct 2017 Last revised: 18 Jan 2018

Mehmet F. Dicle

Loyola University New Orleans - Joseph A. Butt, S.J. College of Business; Research ATA, LLC

Date Written: January 18, 2018

Abstract

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

Dicle, Mehmet F., Increasing Return Response to Changes in Risk (January 18, 2018). Available at SSRN: https://ssrn.com/abstract=3057748 or http://dx.doi.org/10.2139/ssrn.3057748

Mehmet F. Dicle (Contact Author)

Research ATA, LLC ( email )

Mandeville, LA 70448
United States

HOME PAGE: http://researchata.com

Loyola University New Orleans - Joseph A. Butt, S.J. College of Business ( email )

6363 St. Charles Avenue
New Orleans, LA 70118
United States

HOME PAGE: http://researchforprofit.com

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