Risk Aversion Value

[PhillyBanker]

How are risk aversion values factored into returns again? I cant find the LOS. Thanks guys.

 

[hh]

Do you mean utility adjusted return?
U = Er - .005 X Risk aversion score X Variance
I think…

 

[PhillyBanker]

Yes - thats it. Thanks man. Unfortunatley I cant find it in the material to verify the formula.

 

[ilvino]

^^ that looks right to me.
You’re basically reducing the required return for a highly risk-averse investor. A more risk-averse investor has a higher risk aversion score, so you are subtracting a bigger number from the required return.

 

[florinpop]

the formula is correct
you should find it in the asset allocation study session, at the portion where you specify risk & return objectives

 

[dmdanielson]

Where does the .005 coefficient come from?
I have no idea, and I can memorize formulas much better if I know how they were formulated. thanks

 

[BuySideWannabe]

ilvino Wrote:
——————————————————-
> ^^ that looks right to me.
>
> You’re basically reducing the required return for
> a highly risk-averse investor. A more risk-averse
> investor has a higher risk aversion score, so you
> are subtracting a bigger number from the required
> return.
I never read this material, but I remember this from uni….
Your first comments are reversed…a highly risk-averse investor will have a higher required return won’t they? What you’re referring to is UTILITY….the utility function is not required return…the higher risk aversion coefficient reduces utility since it’s multiplied by the variance