Risk Aversion & Asset Allocation in a Low Repo Rate Climate

Sammanfattning: This paper addresses the issue of risk aversion and asset allocation for investors under the current globally low repo rate climate, as we try to examine how the low rate affects investor decisions. As a proxy for investors we have sampled data from several mutual funds, consisting of 50 balanced mutual funds and 15 pension targeting funds, all registered in the United States. Our measures of reallocation within the funds are the beta-values and risk is measured through the funds variance. According to our hypothesis a low repo rate should affect the risk-free asset, lowering its yield. Investors on the market will therefore be inclined to reallocate their portfolios towards the market and away from the risk-free asset, thus taking on more risk. The hypothesis and reasoning in this paper is based on Markowitz assumptions of investors which are risk-averse and mean-variance optimizers, as well as the assumptions of Capital Asset Pricing Model that all investors act homogenous and facing the same risky portfolio and risk-free asset. The result of this paper indicates that a shift within investors risk aversion and asset allocation have occurred, but in a somewhat inconclusive way. The shift seems to depend on the funds' risk aversion and their willingness to change it when exposed to an increased market variance rather than as a direct response to a low risk-free rate. Rendering in the conclusion that the low repo rate affects risk aversion and asset allocation mostly through an increased variance.