How are risk aversion values factored into returns again? I cant find the LOS. Thanks guys.
Do you mean utility adjusted return? U = Er - .005 X Risk aversion score X Variance I think…
Yes - thats it. Thanks man. Unfortunatley I cant find it in the material to verify the formula.
^^ 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.
the formula is correct you should find it in the asset allocation study session, at the portion where you specify risk & return objectives
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
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