Personal Wealth, Risk Tolerance, and Stock Allocation: A Markov Chain Approach

Abstract

As a matter of fact, personal wealth management remains a hot topic in order to gain extra return from financial market. With this in mind, the paper seeks to decipher the impact of an individual's wealth and risk tolerance on their propensity to invest in stocks in three different market sectors and risk allocations. On this basis, primarily using the Markov chain approach, the most appropriate investment allocations can be derived for different wealth and risk profiles. By exploring these transitions, the goal is to identify the optimal allocation of equity funds for individuals at different levels of wealth and risk tolerance. According to the analysis, this study provides insights into investment strategies for wealth dependence and risk tolerance, as well as hopes that a relatively reasonable allocation of financial resources for different income and courage groups can be studied at the same time. Overall, these results shed light on guiding further exploration of stock allocation.