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given someone's past investing history, is there a way to calculate his risk aversion? Say, we know this client's investment history for example his past return, is there a way to calculate his risk aversion and use this parameter to portfolio optimization?

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  • $\begingroup$ Just speaking for myself, no. I'm all over the place as far as types of mutual funds I invest in, and that depends on how I think the economy will go in the next 12 months. So my "average risk tolerance" would not be accurate at all. $\endgroup$ – Bulrush Apr 22 '16 at 21:25
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Generally speaking no. You wouldn't be able to distinguish re-balancing for risk aversion reasons from re-balancing motivated by changes in expected returns or the co-variance of returns.

Consider the simple case of a household periodically re-balancing their investments in across both a fixed index fund and an equity index fund. The econometrician sees the investor reduce their equity holdings and increase the fixed income investment. Any of the following could induce such a change:

  1. An increase in risk aversion
  2. Lower expected returns for the equity index
  3. Higher expected returns for fixed income index
  4. Greater positive co-variation of the two funds

And in reality, the situation is much worse because there are many investments, taxes, transaction costs, behavioral issues, and rational-inattention.

I'm sure you could simplify and cook up a theoretical setting where you could do this (for one, just assume that all the other things cannot change), but in general this won't be possible.

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