Abstract
The paper outlines some thoughts on portfolio construction that take into account investors' asymmetric risk tolerance as commonly argued by adherents to behavioural finance. The paper develops previous empirical findings of investor risk tolerances determined using Choice Modelling of alternate portfolios and argues that portfolio optimisation may need to consider insurance if it is to maximize investor utility. Further, the paper makes the point that while the cost of insurance acts as a drag on returns, the value of insurance allows investors to take greater risks. And while on an aggregate basis pricing of insurance must act to compensate for aggregate downside risk take, on an individual level, the value function works to provide better utility to the individual investor.
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