PORTFOLIO CHOICE UNDER NOISY ASSET RETURNS

The lack of a clear effect of increases in risk upon the demand for ri sky assets has led to many restrictions on the types of risk increases and/or on consumer preferences, in order to obtain unambiguous compar ative statics. This paper examines the particularly simple, yet overlo oked, case of white noise added to the return distribution. It is show n that Kimball's standard risk aversion is sufficient for noise to lea d to reduced demand for risky assets.