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Analyses in the Economics of Aging$
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David A. Wise

Print publication date: 2005

Print ISBN-13: 9780226902869

Published to Chicago Scholarship Online: February 2013

DOI: 10.7208/chicago/9780226903217.001.0001

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Utility Evaluation of Risk in Retirement Saving Accounts

Utility Evaluation of Risk in Retirement Saving Accounts

Chapter:
(p.13) 1 Utility Evaluation of Risk in Retirement Saving Accounts
Source:
Analyses in the Economics of Aging
Author(s):
James M. Poterba, Joshua Rauh, Steven F. Venti, David A. Wise
Publisher:
University of Chicago Press
DOI:10.7208/chicago/9780226903217.003.0002

This chapter evaluates the effect of holding a broadly diversified portfolio of common stocks compared to a portfolio of index bonds on the distribution of 401(k) account balances at retirement using stochastic algorithm. It describes the distribution of wealth outcomes for different investment allocation rules and calculates an expected utility measure corresponding to each distribution. This chapter concludes that both approaches to the evaluation of risk can be important and that the appropriateness of each is likely to depend on the specific goal of the evaluation.

Keywords:   retirement savings, diversified portfolio, common stocks, index bonds, stochastic algorithm, expected utility measure

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