A Mu-Sigma Risk Aversion Paradox and Wealth Dependent Utility

Andreas Loffler

Journal of Risk and Uncertainty, 2001, vol. 23, issue 1, 57-73

Abstract: We report a surprising property of mu-sigma-preferences: the assumption of nonincreasing relative risk aversion implies the optimal portfolio being riskless. We discuss a solution of that paradox using wealth dependent utility functions in detail. Using the revealed preference theory we show that (general, i.e. not necessary mu-sigma) wealth dependent utility functions can be characterized by Wald's axiom. Copyright 2001 by Kluwer Academic Publishers

Date: 2001
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