Portfolio Selection with Quadratic Utility Revisited

Timothy Mathews ()

The Geneva Papers on Risk and Insurance Theory, 2004, vol. 29, issue 2, 137-144

Abstract: Considering a simple portfolio selection problem by agents with quadratic utility, an apparently counterintuitive outcome results. When such a choice is over two assets that can be ordered in terms of riskiness, an agent that is more risk averse may optimally invest a larger portion of wealth in the riskier asset. It is shown that such an outcome is not counterintuitive, since for the portfolios from which agents optimally choose, a larger proportion of investment in the riskier asset leads to a less risky portfolio.

Date: 2004
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