Table 5 summarizes the optimal consumption behavior that is associated with these portfolio rules. The left hand side of the table shows the average consumption-wealth ratio, while the right hand side shows the standard deviation of optimal consumption growth. To understand the patterns of average consumption-wealth ratios, recall that an investor with zero elasticity of intertemporal substitution consumes the annuity value of wealth each period, so the average consumption-wealth ratio for this investor is just the average expected return on the portfolio comments.

This average return declines with risk aversion, and so the average consumption-wealth ratio also declines with risk aversion as shown in the 1/5000 column. Investors with higher elasticities of consumption, shown to the left of the 1/5000 column, are willing to substitute intertemp orally in response to incentives. The direction of the substitution depends on the average return on the portfolio in relation to the time discount rate and the risk of the portfolio. Investors with low risk aversion (at the top of the panel) have high average portfolio returns so they substitute by reducing present consumption, while investors with high risk aversion (at the bottom of the panel) have low average portfolio returns so they substitute by increasing present consumption. The magnitude of these effects is such that all investors with unit elasticity of substitution have the same average consumption-wealth ratio of (1 — <5), regardless of their risk aversion.

T...