Discuss the Differences Between Absolute and Relative Risk Aversion

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The Answer is A tradeoff between risk and return is known as the coefficient of risk aversion.
Assume that the wealth of an investor increases.Now,if the investor does not change the percentage of investment in risky assets from before,the investor is exhibiting constant relative risk aversion.If the investor increases the percentage of investment in risky assets,the investor exhibits decreasing relative risk aversion.On the contrary,if the percentage of investment in risky assets reduces,the investor is said to be exhibiting increasing relative risk aversion.
Absolute risk aversion refers to an investor who only chooses to invest in less risky securities.
The return on an absolute risk aversion portfolio is always lower than that of a relative risk aversion portfolio.
In equilibrium of demand and supply for assets,which is dominated by very risk-averse investors,the risky assets will play a role of stocks that provide a higher expected return in order to attract extra cautious investors.Although,in equilibrium,where there are a lot of relatively risk averse investors,the spread in expected return between risky and non risky assets will be small,bringing in a discrepancy between investors who are absolutely risk averse,and relatively risk averse.

Discuss the Differences Between Absolute and Relative Risk Aversion

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