Increases in Risk Aversion and Portfolio Choice in a Complete Market
This note examines the eﬀect of changes in risk aversion on the optimal portfolio choice in a complete market. It is shown that an agent who is less risk averse in the Pratt (1964) sense than another will choose a portfolio whose payoﬀ is distributed as the other’s payoﬀ plus a nonnegative random variable plus conditional-mean-zero noise. The proof of the result uses simple ﬁrst order conditions and basic results from stochastic dominance.
Dybvig, Philip H., "Increases in Risk Aversion and Portfolio Choice in a Complete Market" (1988). Cowles Foundation Discussion Papers. 1102.