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Mean-Variance Preferences and Investor Behaviour

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  • Ormiston, Michael B
  • Schlee, Edward E

Abstract

We study the comparative statics implications of mean-variance preferences for optimal portfolios. Specifically, we show that all risk-averse mean-variance investors raise their investment in a risky asset in response to a change in that asset's return distribution if and only if the change lowers both the mean and standard deviation of the return by the same percentage. Besides being of interest in its own right, our results allow us to compare some comparative statics implications and the expected utility and mean-variance models systematically.

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Bibliographic Info

Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 111 (2001)
Issue (Month): 474 (October)
Pages: 849-61

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Handle: RePEc:ecj:econjl:v:111:y:2001:i:474:p:849-61

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Cited by:
  1. Petr Havlik & Geoffroy Enjolras & Jean-Marie Boisson & Florence Jacquet & Michel Lherm & Patrick Veysset, 2008. "Environmental good production in the optimum activities portfolio of a risk averse-farmer," Review of Agricultural and Environmental Studies - Revue d'Etudes en Agriculture et Environnement, INRA Department of Economics, vol. 86(1), pages 9-33.
  2. Bilancini, Ennio & D’Antoni, Massimo, 2012. "The desirability of pay-as-you-go pensions when relative consumption matters and returns are stochastic," Economics Letters, Elsevier, vol. 117(2), pages 418-422.
  3. Udo Broll & Jack E. Wahl & Wing-Keung Wong, 2005. "Elasticity of risk aversion and international trade," Development Research Unit Working Paper Series 07/05, Monash University, Department of Economics.
  4. Edward Schlee & Christian Gollier, . "Increased Risk-Bearing with Background Risk," Working Papers 2132848, Department of Economics, W. P. Carey School of Business, Arizona State University.
  5. Broll, Udo & Wong, Wing-Keung & Wu, Mojia, 2013. "Banking Firm and Two-Moment Decision Making," MPRA Paper 51687, University Library of Munich, Germany.
  6. G. Boyle & D. Conniffe, 2005. "When does ‘All Eggs in One Risky Basket’ Make Sense?," Economics, Finance and Accounting Department Working Paper Series n1550305, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.
  7. Trino-Manuel Niguez & Ivan Paya & David Peel & Javier Perote, 2013. "Higher-order moments in the theory of diversification and portfolio composition," Working Papers 18297128, Lancaster University Management School, Economics Department.
  8. Schlee, Edward & Chade, Hector, 2012. "Optimal insurance with adverse selection," Theoretical Economics, Econometric Society, vol. 7(3), September.
  9. Thomas Eichner & Andreas Wagener, 2011. "Portfolio allocation and asset demand with mean-variance preferences," Theory and Decision, Springer, vol. 70(2), pages 179-193, February.
  10. Broll, Udo & Egozcue, Martín & Wong, Wing-Keung, 2009. "Prospect theory and two moment model: the firm under price uncertainty," Dresden Discussion Paper Series in Economics 01/09, Dresden University of Technology, Faculty of Business and Economics, Department of Economics.
  11. Udo Broll & Jack E. Wahl, 2004. "Optimal hedge ratio and elasticity of risk aversion," Economics Bulletin, AccessEcon, vol. 6(5), pages 1-7.
  12. Thomas Eichner & Andreas Wagener, 2004. "Relative risk aversion, relative prudence and comparative statics under uncertainty: The case of (μ, σ)-preferences," Bulletin of Economic Research, Wiley Blackwell, vol. 56(2), pages 159-170, 04.
  13. Aivaliotis, Georgios & Palczewski, Jan, 2014. "Investment strategies and compensation of a mean–variance optimizing fund manager," European Journal of Operational Research, Elsevier, vol. 234(2), pages 561-570.
  14. Chambers, Robert G & Grant, Simon & Polak, Ben & Quiggin, John, 2011. "A Two-Parameter Model of Dispersion Aversion," Risk and Sustainable Management Group Working Papers 151196, University of Queensland, School of Economics.
  15. Broll, Udo & Gilroy, B. Michael & Wahl, Jack E., 2003. "Information, unternehmensinterne Kommunikation und Risikopolitik," Dresden Discussion Paper Series in Economics 06/03, Dresden University of Technology, Faculty of Business and Economics, Department of Economics.
  16. Ennio Bilancini & Massimo D'Antoni, 2008. "Pensions and Intergenerational Risk-Sharing When Relative Consumption Matters," Department of Economics University of Siena 541, Department of Economics, University of Siena.
  17. Wagener, Andreas, 2003. "Comparative statics under uncertainty: The case of mean-variance preferences," European Journal of Operational Research, Elsevier, vol. 151(1), pages 224-232, November.
  18. Eichner, Thomas & Wagener, Andreas, 2012. "Tempering effects of (dependent) background risks: A mean-variance analysis of portfolio selection," Journal of Mathematical Economics, Elsevier, vol. 48(6), pages 422-430.

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