Abstract
Investors in investing are always accompanied by a sense of tolerance for the risk of funds invested in an asset. Each investor has a different form of risk tolerance, depending on the function of the utility. This paper aims to conduct a theoretical study of the forms of investor risk tolerance for several utility functions. This study is carried out by reviewing several utility functions which include: square root utility, cubic fraction utility, quadratic utility, exponential negative utility, and logarithmic utility. Based on the results of the study for each of these utility functions, successively obtained risk tolerance in the form of linear, linear, linear, constant, and linear. Linear risk tolerance illustrates that an investor changes the value of his investment in line with changes in the level of risk faced.
Highlights
In investing, investors can choose to invest their funds in various assets, both risk assets and risk-free assets, or a combination of the two assets
The utility function for each investor can be different, and this will form a different level of risk tolerance for each investor (Ardehali, 2004)
Based on the utility function owned by an investor, the risk aversion function and the risk tolerance function can be determined
Summary
Investors can choose to invest their funds in various assets, both risk assets and risk-free assets, or a combination of the two assets. In the context of portfolio management, the utility function shows an investor's preference for various investment choices with each risk and the expected rate of Jumadil Saputra / International Journal of Research in Community Service, Vol 1, No 3, pp. Investment analysis usually uses the assumption that investors are risk-averse or do not like risk. Referring to Husnan (2001), this hopeful utility model uses the assumption of investor attitudes towards risk. These attitudes are grouped into three, namely attitudes that are risk-averse (do not like risk), risk-neutral (neutral against risk), and risk seekers (like risk). The following is discussed first about risk tolerance in the Markowitz model
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