Asset Allocation Given Non-Market Wealth Risk and Rollover Risk

We show the effect, on optimal portfolio strategy, of a combination of additive non-market wealth risks and multiplicative rollover risks. Non-market wealth risk may be associated, for example, with uncertain labor income or bequests. Rollover risk may be associated, for example, with converting portfolio returns into different currencies or into pension annuities. The combined effects of the two types of risk may help to explain some puzzling anomalies. For example, while an increase in rollover risk alone may induce less risk-averse behaviour, a similar increase may induce more risk-averse behaviour in the presence of non-market wealth risk.

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