Increases in risk and optimal portfolio

Georges Dionne (), François Gagnon and Kaïs Dachraoui
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François Gagnon: Caisse de dépôt et placement du Québec
Kaïs Dachraoui: Université de Montréal

No 97-11, Working Papers from HEC Montreal, Canada Research Chair in Risk Management

Abstract: We study the effect of riskiness on optimal portfolio. As discussed by Levy (1992), the main drawback of the standard model with one decision variable and one risky asset developed over the last twenty-five years, following the contributions of Rothschild and Stiglitz (1970, 1971) and Hadar and Russell (1969), is in the area of finance since this framework is not appropriate to study portfolio diversification. Our purpose is to answer the following question: How a mean preserving spread on the returns of a given asset affect the composition of an optimal portfolio with two risky assets and one riskless asset? We propose a methodology to answer this difficult question and we show that we must introduce different restrictions on the set of von Newman-Morgenstern utility functions and that of returns distribution functions to obtain intuitive results. However, we do not have to limit the analysis to the mean-variance model.

Keywords: Optimal portfolio; riskiness; increases in risk; mean preserving spread; portfolio returns; returns distribution (search for similar items in EconPapers)
JEL-codes: D81 G11 (search for similar items in EconPapers)
Pages: 45 pages
Date: 1998-12-01
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Related works:
Working Paper: Increases in risk and optimal portfolio (1997)
Working Paper: Increases in Risk and Optimal Portfolio (1997)
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Persistent link: https://EconPapers.repec.org/RePEc:ris:crcrmw:1997_011

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