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Handbook of the Economics of Finance by Rene M. Stulz, Milton Harris, George M. Constantinides

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Non-CRRA Preferences

Non-CRRA preferences may generate rebalancing over the life-cycle. For instance, if individuals have hyperbolic Bernoulli utility

image

Merton (1971) shows that the optimal portfolio risky share depends on age even without labor income:

image (4.2)

With image, older investors take less financial risk than the young. Gollier and Zeckhauser (2002) consider a general characterization of risk tolerance and show that departure from linearity generates ...

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