Risk aversion, prudence, and asset allocation : a review and some new developments
(2016) Theory and Decision : an international journal for multidisciplinary advances in decision sciences — Vol. 80, n° 2, p. 227-243 (2016)
Files
ISBARP_2016_09_denuit_Riskaversionprudenceandassetallocationareview.pdf
Closed Access - Adobe PDF
- 617.89 KB
Details
- Authors
- Abstract
- In this paper, we consider the composition of an optimal portfolio made of two dependent risky assets. The investor is first assumed to be a risk-averse expected utility maximizer, and we recover the existing conditions under which all these investors hold at least some percentage of their portfolio in one of the assets. Then, we assume that the decision maker is not only risk-averse, but also prudent and we obtain new minimum demand conditions as well as intuitively appealing interpretations for them. Finally, we consider the general case of investor’s preferences exhibiting risk apportionment of any order and we derive the corresponding minimum demand conditions. As a byproduct, we obtain conditions such that an investor holds either a positive quantity of one of the assets (positive demand condition) or a proportion greater than 50 % (i.e., the “50 % rule”).
- Affiliations
Citations
Denuit, M., & Eeckhoudt, L. (2016). Risk aversion, prudence, and asset allocation : a review and some new developments. Theory and Decision : an international journal for multidisciplinary advances in decision sciences, 80(2), 227-243. https://doi.org/10.1007/s11238-015-9503-2 (Original work published 2016)