Title

Increases in Risk Aversion and Portfolio Choice in a Complete Market

Document Type

Discussion Paper

Publication Date

2-1-1988

CFDP Number

859

CFDP Pages

10

Abstract

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.

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