Subjective and Objective Risk Tolerance: Implications for Optimal Portfolios

10 Pages Posted: 15 Jun 1998

See all articles by Sherman D. Hanna

Sherman D. Hanna

Ohio State University (OSU)

Peng Chen

Ibbotson Associates

Abstract

The distinction between subjective and objective risk tolerance is illustrated by expected utility analyses of portfolios. Optimal portfolios were derived for one, 5, and 20 year investment horizons for 6 major financial asset categories. The important aspects of objective risk tolerance are the proportion of an investor's total wealth (including human wealth) in financial assets, and the investment horizon. Even investors with very low subjective risk tolerance levels should have aggressive portfolios if their horizons are 20 years or more.

JEL Classification: G18, D81, G11

Suggested Citation

Hanna, Sherman D. and Chen, Peng, Subjective and Objective Risk Tolerance: Implications for Optimal Portfolios. Financial Counseling and Planning. Available at SSRN: https://ssrn.com/abstract=95488 or http://dx.doi.org/10.2139/ssrn.95488

Sherman D. Hanna (Contact Author)

Ohio State University (OSU) ( email )

1787 Neil Avenue
Campbell 265D
Columbus, OH 43210
United States
614-292-4584 (Phone)

Peng Chen

Ibbotson Associates ( email )

225 North Michigan Avenue
Suite 700
Chicago, IL 60601
United States
(312) 616-1620 (Phone)
(312) 616-0404 (Fax)

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