William Hanchett, Financial Economics
“The Effects of Risk Aversion on Portfolio Asset Allocation”
Standard advice for retirement investment portfolios makes use of a glide path by which the portfolio holds less in stock and more in bonds over time. This implicitly assumes a rising level of risk aversion of investors as they approach retirement. This study examined how those percentages are calculated and more specifically, what those percentages imply about both the level and path of investors’ risk aversion. Through utility analysis and simulation methods, this study has shown that a one-size-fits-all glide path cannot be the optimum for all investors when their risk aversion varies. A wider variety of investment strategies would benefit investors. For example, rather than a single path for all investors, aggressive, moderate, and conservative strategies can be used. With a more individually tailored portfolio, an investor can use a more appropriate investment strategy. Implementing more congruous strategies, however, requires improved assessments of investors’ risk aversion, so ways to do this were also examined.
How did you decide on your research project?
The topic was presented to me by Dr. Lamdin of the Economics Department.
What courses or other experiences prepared you for this research project?
I work in the field of finance which definitely helped when exploring different concepts while I researched the topic. The courses I'd taken in personal finance as well as macroeconomics definitely helped when applying the ideas and implications of the data to the real world.
What was the hardest part of your research?
The hardest part was pulling all of the data together to form cohesive conclusions. With so much information, it took a lot of time and analysis to figure out which parts were most relevant. I also wanted those who saw my presentation and/or read my paper to really grasp the implications, so getting my points across congruently was challenging, but definitely an enriching learning experience.
Does your research connect back to the courses you are taking?
My research definitely connected to my classes, most specifically the macroeconomics class I was taking at the time through large scale implications of the research itself. Becoming familiar with more research methods and formats gave me new perspective on some of the material covered in previous classes as well. I had taken Dr. Lamdin's corporate finance class and I applied material learned from that class and statistics classes in gathering and analyzing the data.
What are your plans for after UMBC?
I want to do the Master's program at UMBC through the Economics and Public Policy departments. I may also complete a Master's program elsewhere in Economics; more specifically, International Economic Policy and Analysis, but I'm very interested in many different subjects as they relate to Economics, Public Policy and Finance.
Do you plan to do anything that builds on your research?
I've definitely had many ideas that have come from researching this topic that tie financial markets with economic indicators as well as analyzing past economic policy's effects on current conditions in both the US and other areas of the world. I believe this topic has many, many different paths for interest and I'm open to exploring some of them in the future.
What advice do you have for other undergraduate about the research opportunities at UMBC?
Definitely be active in seeking out opportunities and if you're like me and are presented with the opportunity, do not hesitate to do it. I had a lot going on the past semester, but researching was such as rewarding experience even though my workload was stacked. Also, don't be afraid to look into every possibility for information because you never know what aspect may be important to your research.