Some Forms of InvestorRiskTolerance in Investing: Review Theory

Jumadil Saputra


Investors in investing are always accompanied by a sense of tolerance for the risk of funds invested in an asset. Each investor has a different form of risk tolerance, depending on the function of the utility. This paper aims to conduct a theoretical study of the forms of investor risk tolerance for several utility functions. This study is carried out by reviewing several utility functions which include: square root utility, cubic fraction utility, quadratic utility, exponential negative utility, and logarithmic utility. Based on the results of the study for each of these utility functions, successively obtained risk tolerance in the form of linear, linear, linear, constant, and linear. Linear risk tolerance illustrates that an investor changes the value of his investment in line with changes in the level of risk faced.


: Investment, investors, risk, utility function, risk tolerance

Full Text:



Ardehali, P.H. (2004). Assessing financial risk tolerance of portfolio investors using data envelopment analysis. Working Paper. Faculty of Applied Science and Engineering, University of Toronto, Canada.

Ardia, D. & Boudt, K. (2013). Implied expected returns and the choice of a mean-variance efficient portfolio proxy. Working Paper. A Department de finance, assurance etimmobilier, Universite Laval, Quebec City (Quebec), Canada.

Baber, B.M. & Odean, T. (2011). The behavior of individual investors. Working Paper. Electronic copy available at: abstract=1872211.

Bjork, T., Murgoci, A. & Zhou, X.Y. (2011). Mean-variance portfolio optimization with state-dependent risk aversion. Working Paper. Department of Finance, StockholmSchool of Economics, Box 6501, SE-113 83 Stockholm, SWEDEN. E-mail:

Brandt, M.W. (2010). Portfolio choice problems. Working Paper. Fuqua School of Business, Duke University, Durham,NC.

Gorter, J. & Bikker, J.A. (2011). Investment risk-taking by institutional investors. DNB Working Paper, No. 294/ May 2011.

Gurrib, I. & Alshahrani, S. (2012). Diversification in Portfolio Risk Management: The Case of the UAE Financial Market. International Journal of Trade, Economics, and Finance, 3(6).

Husnan, S. (2001). Dasar-dasar Teori Portofolio dan Analisis Sekuritas, Edisi Ketiga, Yogyakarta, UPP AMP YKPN.

Janecek, K. (2004). What is a realistic aversion to risk for real-world individual investors?. Working Paper. Department of Mathematics, Carnegie Mellon University, Pittsburgh, PA 15213, USA.

Kirby, C. & Ostdiek, B. (2012). Optimizing the performance of sample mean-variance efficient portfolios. Working Paper. Belk College of Business, the University of North Carolina at Charlotte.

Panjer, H.H., Boyle, D.D., Cox, S.H., Dufresne, D., Gerber, H.U., Mueller, H.H., Pedersen, H.W., & Pliska, S.R. (1998). Financial economics. With applications to investments, insurance, and pensions. Schaumberg, Illinois: the Actuarial Foundation.



  • There are currently no refbacks.

Creative Commons License
This work is licensed under a Creative Commons Attribution 4.0 International License.

Published By: 

IJRCS: Jalan Riung Ampuh No. 3, Riung Bandung, Kota Bandung 40295, Jawa Barat, Indonesia

Indexed By: 

width= width=  width= width= width= width=