Samson Ojunga
Nov 9, 2023
Distinguish between global risk aversion and relative risk aversion?
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Nov 9, 2023
Global risk aversion refers to an individual's overall attitude towards risk. It is a measure of how risk-averse or risk-seeking an individual is in general. A person with high global risk aversion tends to avoid risky situations and prefers safer options, while a person with low global risk aversion is more willing to take risks and pursue higher returns.
Relative risk aversion, on the other hand, compares an individual's risk aversion to the level of wealth or income they possess. It is a measure of how risk-averse an individual is relative to their own financial situation. For example, two individuals with different levels of wealth may have the same global risk aversion, but the one with lower wealth may have higher relative risk aversion as they are more sensitive to potential losses.
In summary, global risk aversion is a general measure of an individual's overall attitude towards risk, while relative risk aversion compares an individual's risk aversion to their own financial situation.
Relative risk aversion, on the other hand, compares an individual's risk aversion to the level of wealth or income they possess. It is a measure of how risk-averse an individual is relative to their own financial situation. For example, two individuals with different levels of wealth may have the same global risk aversion, but the one with lower wealth may have higher relative risk aversion as they are more sensitive to potential losses.
In summary, global risk aversion is a general measure of an individual's overall attitude towards risk, while relative risk aversion compares an individual's risk aversion to their own financial situation.
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