Increases in Risk Aversion and Portfolio Choice in a Complete Market

Philip Dybvig

No 859, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: This note examines the effect of changes in risk aversion on the optimal portfolio choice in a complete market. It is shown that an agent who is less risk averse in the Pratt (1964) sense than another will choose a portfolio whose payoff is distributed as the other's payoff plus a nonnegative random variable plus conditional-mean-zero noise. The proof of the result uses simple first order conditions and basic results from stochastic dominance.

Keywords: Investments; portfolio theory; stochastic dominance; risk aversion; complete markets (search for similar items in EconPapers)
Pages: 10 pages
Date: 1988-02
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