RISK PREFERENCE AND INDIRECT UTILITY IN PORTFOLIO-CHOICE PROBLEMS

We consider a portfolio-choice problem with one risky and one safe ass et, where the utility function exhibits decreasing absolute risk avers ion (DARA). We show that the indirect utility function of the portfoli o-choice problem need not exhibit DARA. However, if the (optimal) marg inal propensity to invest is positive for both assets, which is true w hen the utility function exhibits non-decreasing relative risk aversio n, then the DARA property is carried over from the direct to the indir ect utility function.