Question

assume you get older, you become more risk averse. What implication would this have on your optimal total portfolio in a CAPM world? Would different individual assets be selected at later age than now?

Answer 1

Age definitely has an impact on the choice of securities and your overall risk taking ability. As a person gets older he prefers safer investment that pay fixed returns along with investments that have shorter maturity terms. A person in his 20's who has just graduated out of college and has taken up a job will have higher risk taking ability and may invest in high risk and high return securities. The CAPM i.e. the expected return of such an investor is usually high since the beta along with the risk premium is way higher. An individual in his mid 30's will focus on aggressive growth and will try to balance his portfolio between fixed and risky investments to build on his retirement options. In 40's an individual will try to align his investment strategies with that of his retirement plans and purchasing risky stocks depends on how much he has already saved. The CAPM at this age is lower than what he may have had in his 20's. In 50's and 60's an individual's CAPM is very low since the investor prefers only safer investments and does not have high expectations of returns from varied securities. He would prefer fixed income bonds, retirement plans among others.