Microeconomics

0 2165

There are two kinds of risk aversion: Absolute and Relative. Absolute risk aversion has implications for the willingness of individuals to accept risk. The higher the coefficient of absolute risk aversion, the higher the risk premium the individual is willing to pay. On the other hand, relative risk aversion is absolute risk aversion times W, indicating initial Wealth. The higher the coefficient of relative risk aversion, the higher the relative risk premium. Two examples below would explain Absolute Risk Aversion based on microeconomics point of view.

0 1207

Absolute risk aversion has implications for the willingness of individuals to accept risk. The higher the coefficient of absolute risk aversion, the higher the risk premium the individual is willing to pay. On the other hand, relative risk aversion is absolute risk aversion times W, indicating initial Wealth. The higher the coefficient of relative risk aversion, the higher the relative risk premium. Two examples below would explain Relative Risk Aversion based on microeconomics point of view.