RELATIVE RISK-AVERSION WITH ARROW-DEBREU SECURITIES

This note considers a porfolio problem with a complete set of Arrow-De breu securities, each of which pays a positive return in only one stat e. It is shown that an increase in the return to asset i in state i ca uses an increase (no change; a decrease) in demand for asset i if and only if relative risk aversion evaluated in state i is less than (equa l to; greater than) unity. Demands for all other assets change in the opposite direction.