Risk aversion and capital allocation to risky assets
3 important questions on Risk aversion and capital allocation to risky assets
What is the most straightforward way to control risk in a portfolio?
The most straightforward way to control the risk of the portfolio is through the fraction of the portfolio invested in Treasury bills and other safe money market securities versus risky assets. This capital allocation decision is an example of an asset allocation choice—a choice among broad investment classes, rather than among the specific securities within each asset class.
How do you decrease risk by decreasing the proportion of the risky portfolio?
As long as we do not alter the weights of each security within the risky portfolio, the probabil- ity distribution of the rate of return on the risky portfolio remains unchanged by the asset reallocation. What will change is the probability distribution of the rate of return on the complete portfolio that consists of the risky asset and the risk-free asset.
Which three types of securities do most money market funds hold?
- Treasury bills
- Bank certificats of deposits
- Commercial paper
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