What are typical values for risk aversion parameters $\lambda$ used in mean-variance optimization? Please provide references.

Just to be clear, I'm talking about the $\lambda$ in $U(w) = w'\mu - \frac{\lambda}{2} w' \Sigma w$, the utility function in mean-variance optimization.

  • $\begingroup$ Shouldn't it be "-" the variance term?!? $\endgroup$
    – vonjd
    Jul 7, 2013 at 18:33
  • 1
    $\begingroup$ @vonjd You are right. Just edited. $\endgroup$ Jul 9, 2013 at 0:45
  • $\begingroup$ I have a somewhat related question on Economics SE. $\endgroup$ Aug 16, 2019 at 6:41

2 Answers 2


Typical risk aversion levels lie between one and ten.

See pages 11f. in the following paper:
Preferences by Andrew Ang

EDIT: The paper was a preprint, the final source is the following book:

Asset Management: A Systematic Approach to Factor Investing (Financial Management Association Survey and Synthesis) 1st Edition by Andrew Ang

  • $\begingroup$ Thanks for the response. That is the risk aversion parameter for CARA utility though, not for mean-variance utility. Unless you are suggesting there is a direct way to transform into the latter? (I don't think so. The latter is not unitless and depends on the unit in which you measure returns) $\endgroup$ Jul 9, 2013 at 1:05
  • 2
    $\begingroup$ Please read the paper first: On page 29 it e.g. says: "The mean-variance solution in equation (10) turns out to be the same as CRRA utility (see equation (1)) if returns are log-normally distributed. This is one sense that mean-variance and CRRA are the same." $\endgroup$
    – vonjd
    Jul 9, 2013 at 8:02
  • $\begingroup$ The link has gone dead. $\endgroup$ Aug 14, 2019 at 12:32
  • $\begingroup$ @RichardHardy: Will have a look... Thank you! $\endgroup$
    – vonjd
    Aug 14, 2019 at 15:25
  • $\begingroup$ Is it perhaps Ang "Asset Management: A Systematic Approach to Factor Investing" (2014)? See also my somewhat related question on Economics SE. $\endgroup$ Aug 16, 2019 at 6:39

The risk aversion coefficient is also referred to as the Arrow-Pratt risk aversion index. When λ is small (i.e., the aversion to risk is low), the pen- alty from the contribution of the portfolio risk is also small, leading to more risky portfolios. Conversely, when λ is large, portfolios with more exposures to risk become more highly penalized. If we gradually increase λ from zero and for each instance solve the optimization problem, we end up calculating each portfolio along the efficient frontier. It is a common practice to calibrate λ such that a particular portfolio has the desired risk profile. The calibration is often performed via backtests with historical data. For most portfolio allocation decisions in investment management applications, the risk aversion is somewhere between 2 and 4.----BY petter kolm's book


Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge you have read our privacy policy.

Not the answer you're looking for? Browse other questions tagged or ask your own question.