Economics Risk And Return Questions Medium
The risk aversion coefficient is calculated by dividing the difference in expected returns between two investment options by the difference in their standard deviations. Mathematically, it can be expressed as:
Risk Aversion Coefficient = (Expected Return of Option A - Expected Return of Option B) / (Standard Deviation of Option A - Standard Deviation of Option B)
The risk aversion coefficient measures an individual's or investor's willingness to take on risk. A higher coefficient indicates a higher level of risk aversion, meaning the individual or investor is less willing to take on risky investments for potentially higher returns. Conversely, a lower coefficient indicates a lower level of risk aversion, suggesting a greater willingness to take on risk for potentially higher returns.