Ross' measure of risk aversion and portfolio selection |
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Authors: | Josef Hadar Tae Kun Seo |
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Institution: | 1. Department of Economics, Southern Methodist University, 75275, Dallas, Texas 2. Department of Economics, Southern Methodist University, 75275, Dallas, Texas
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Abstract: | This article shows that if Ross' definition of riskier is replaced by a more traditional definition, such as a mean-preserving spread or second-degree stochastic dominance, then the application of Ross's stronger measure of risk aversion to the portfolio problem may no longer produce the desired result. It is also shown that the stronger measure may not perform satisfactorily when applied to exponential utility functions.The authors are grateful to John Pratt for his helpful comments. |
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Keywords: | measure of risk aversion portfolio diversification riskier |
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