MIXED RISK-AVERSION

We analyze the class of increasing utility functions exhibiting all de rivatives of alternating sign. This property, that we call mixed risk aversion, is satisfied by the utility functions most commonly used in financial economics. The utility functions displaying mixed risk avers ion can be expressed as mixtures of exponential functions. We characte rize stochastic dominance and we find conditions for both mutual aggra vation and mutual amelioration of risks when agents are mixed risk ave rse. Finally, the analysis of the distribution function describing a m ixed utility allows one to characterize the behaviour of its indexes o f risk aversion and to discuss its implications for portfolio selectio n. (C) 1996 Academic Press, Inc.