Prudence, Diversification and Optimal Portfolios

Denuit, Michel;Eeckhoudt, Louis
(2014) , 16 pages

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Abstract
In this paper, we consider the composition of an optimal portfolio made of two dependent risky assets. The investor is assumed to be a risk-averse and prudent expected utility max- imizer. We first study the conditions under which all these investors hold at least some percentage of their portfolio in one of the assets. As a byproduct we obtain conditions such that a risk-averse and prudent decision maker holds either a positive quantity of one of the assets or a proportion greater than 50% (i.e. the "50% rule"). These questions had been examined so far in the literature with no assumption beyond that of risk aversion.
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Denuit, M., & Eeckhoudt, L. (2014). Prudence, Diversification and Optimal Portfolios (ISBA Discussion Paper 2014/36). https://hdl.handle.net/2078.5/195067