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Measures of Risk Aversion: Some Clarifying Comments

Published online by Cambridge University Press:  19 October 2009

Stephen M. Miller
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Extract

Two prominent views pertaining to measures of risk aversion can be found in the literature. First, Arrow [2] and Pratt [3]developed risk aversion measures based on the curvature characteristics of the individual investor's utility for wealth function. If the investor's utility for wealth function is given by V(W), then

are the Arrow-Pratt measures of absolute and relative risk aversion, respectively. The investor is risk averse or a risk lover as r(W) and r* (W) are positive or negative. The investor exhibits increasing, constant, or decreasing absolute risk aversion as while he exhibits increasing, constant, or decreasing relative risk aversion as .

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 10 , Issue 2 , June 1975 , pp. 299 - 309
Copyright
Copyright © School of Business Administration, University of Washington 1975

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References

REFERENCES

[1]Adler, M. “On the Risk-Return Trade-off in the Valuation of Assets.” Journal of Financial and Quantitative Analysis, vol. 4 (December 1969), pp. 493–512.CrossRefGoogle Scholar
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