A mu-sigma-risk aversion paradox and wealth dependent utility

Authors
Loffler, A
Citation
A. Loffler, A mu-sigma-risk aversion paradox and wealth dependent utility, J RISK UNC, 23(1), 2001, pp. 57-73
Citations number
24
Categorie Soggetti
Economics
Journal title
JOURNAL OF RISK AND UNCERTAINTY
ISSN journal
08955646 → ACNP
Volume
23
Issue
1
Year of publication
2001
Pages
57 - 73
Database
ISI
SICI code
0895-5646(2001)23:1<57:AMAPAW>2.0.ZU;2-1
Abstract
We report a surprising property of mu-sigma -preferences: the assumption of nonincreasing relative risk aversion implies the optimal portfolio being r iskless. We discuss a solution of that paradox using wealth dependent utili ty functions in detail. Using the revealed preference theory we show that ( general, i.e. not necessary mu-sigma) wealth dependent utility functions ca n be characterized by Wald's axiom.