Risk investment decisions within the deterministic equivalent income model

Abstract

Purpose The purpose of this paper is to establish a deterministic equivalent income model (DEIM) based on the risk cost (RC) and risk aversion of investors. The model fully considers both subjective and objective factors that affect risk investment and reasonably evaluates risk investment schemes to choose the correct investment scheme and gain greater investment returns. Design/methodology/approach The utility function is used to measure the extent to which an investor is satisfied by investment returns in various scenarios. Risk aversion expresses subjective attitude of investors to risk. RC represents risk loss in currency. This methodology is based on risk aversion function, utility function and RC theory to establish DEIM. Findings This study shows that investors with different risk preferences have different certainty equivalent returns (CER), so their choices of investment options change accordingly. Practical implications In this paper, the authors use DEIM to test an investment case and conclude that the CER and investment scheme both change with different risk preferences. At the same time, case analysis shows that DEIM is reasonable and stable when evaluating risk investment schemes. Originality/value In this study, the authors innovate by introducing both the RC and risk aversion degree into risk investment schemes evaluation and by deriving a utility function from the absolute risk aversion function to build a utility decision matrix and establish DEIM. The model combines the subjective and objective factors that influence risk investment decisions.