Written By: Robert O. Weagley and Colleen F. Gannon
Wealth and stage in the life cycle affect investors’ willingness to assume investment risk. This proposition was tested in an examination of investor asset allocations among the asset categories of savings, housing, financial securities, and retirement investments. It was found that, on average, the diversification of household asset portfolios toward riskier investment categories increases as wealth increases. Whether this result follows from a decreasing relative risk aversion utility function or a combination of transaction costs and consumer lack of knowledge about alternative investments is unknown. In addition, as households age, they take on an increasing amount of investment risk until imminent retirement reduces the risk of portfolios. KEY WORDS: assets, investment management, risk aversion
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