Modelling portfolio diversification

What is it about?

Agents decision to diversify their portfolio depends not only on risk aversion but also on prudence and temperance. These preferences imply a certain relationship between the statistical moments of the returns distribution. These relationships cannot be captured with typically employed distribution functions. We have shown that this is possible using more flexible distribution functions.

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Why is it important?

We show how the use of flexible distribution functions makes it possible to identify risk attitudes such as prudence and temperance in the decision to allocate wealth to risky assets. Thus, portfolio design can take into account the whole risk profile of the agents and not only risk aversion.