  We propose a novel approach to infer investors' risk preferences from their
portfolio choices, and then use the implied risk preferences to measure the
efficiency of investment portfolios. We analyze a dataset spanning a period of
six years, consisting of end of month stock trading records, along with
investors' demographic information and self-assessed financial knowledge.
Unlike estimates of risk aversion based on the share of risky assets, our
statistical analysis suggests that the implied risk aversion coefficient of an
investor increases with her wealth and financial literacy. Portfolio
diversification, Sharpe ratio, and expected portfolio returns correlate
positively with the efficiency of the portfolio, whereas a higher standard
deviation reduces the efficiency of the portfolio. We find that affluent and
financially educated investors as well as those holding retirement related
accounts hold more efficient portfolios.
