Absolute Risk Aversion on the Romanian Capital Market

Stock prices move as corporate earnings prospects change, but they also move as investors change their aversion to risk. One of the central tenets of finance is that investors expect higher return for taking risk. They exchange some of their riskless securities for risky assets because they expect the total payoff in the long run to be optimal in terms of the risk-return trade-off. The previous studies proved that expected return is linearly related to risk and if we further assume investors are risk averse, the alluded relation will have to be positive. Aversion to risk is reflected on a risk premium, which consists of an expected extra return that investors require to be compensated for the risk of holding stocks. In this paper, we tried to assess the risk aversion on the Romanian capital market by using the optimal portfolio selection method.

Keywords: equity funds, optimal portfolio selection, risk aversion, utility
JEL Classification: G12