A New Example of a Closed Form Mean-Variance Representation

Keith McLaren

No 1/09, Monash Econometrics and Business Statistics Working Papers from Monash University, Department of Econometrics and Business Statistics

Abstract: In most finance papers and textbooks mean-variance preferences are usually introduced and motivated as a special case of expected utility theory. In general, the two sufficient conditions to allow this are either quadratic preferences with an arbitrary distribution of stochastic assets, or arbitrary preferences with Normally distributed assets. In the first case, the specific functional form of mean-variance preferences follows naturally. In the second case, the only specific functional form usually provided is the case of negative exponential preferences. In this note, the specific functional form for mean-variance preferences is derived for the much more realistic example of lognormally distributed assets, and constant relative risk aversion (CRRA) preferences.

Keywords: Mean-variance preferences; expected utility; lognormal assets; risk aversion (search for similar items in EconPapers)
JEL-codes: D81 G11 (search for similar items in EconPapers)
Pages: 6 pages
Date: 2009-02
New Economics Papers: this item is included in nep-upt
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