THE COMPARATIVE STATICS OF CHANGES IN RISK REVISITED

In this paper, we consider the problem of determining the conditions u nder which a change in risk increases the optimal value of a decision variable for all risk-averse agents. For a large class of payoff funct ions, we obtain the least constraining (necessary and sufficient) cond ition on the change in risk for signing its effect without any additio nal restriction on the utility function than risk aversion. It entails all existing sufficient conditions as particular cases. Our results a re applied to the linear model which describes the standard portfolio problem. The necessary and sufficient condition for unambiguous compar ative statics in this class of problems is termed ''greater central ri skiness'' (CR). It is shown that CR dominance is neither stronger nor weaker than second-degree stochastic dominance. (C) 1995 Academic Pres s, Inc.