Hanna, S. & Chen, P. (1997). Subjective and objective risk tolerance: Implications for optimal portfolios. Financial Counseling and Planning, 8(2), 17-25.


Hanna, S. & Chen, P. (1997). Subjective and objective risk tolerance:
Implications for optimal portfolios. Financial Counseling and Planning,
8(2),
17-25.


Subjective And Objective Risk Tolerance:

Implications For Optimal Portfolios

Sherman Hanna1
and Peng Chen2

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.

Key Words: Risk tolerance, Portfolios, Investment


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Supplementary material:

First attempt
at portfolio recommendations based on subjective and objective risk tolerance


1. Sherman Hanna, Professor,
Consumer Sciences Department, The Ohio State University, 1787
Neil Ave., Columbus, OH 43210-1295. Phone: 614-292-4584. Fax: 603-457-6577.
E-mail: hanna.1@osu.edu

2. Peng Chen, Ph.D., Vice President
for Research, Ibbotson Associates, Chicago, Illinois. This paper was written
while he was a Ph.D. student in the Consumer Sciences Department,
The Ohio State University. E-mail: pchen@ibbotson.com