Hanna, S. & Chen, P. (1997). Subjective and objective risk tolerance: Implications for optimal portfolios. <I>Financial Counseling and Planning</I>, <I>8</I>(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

Complete article (Acrobat format)
To read and/or print this article in Acrobat format, you may need to download a free Adobe Acrobat Reader. Click here if you want to download the software.

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. 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