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Asset Demands without the Independence Axiom

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  • Dekel, Eddie

Abstract

An important application of the theory of choice under uncertainty is to asset markets, and an important property in these markets is a preference for portfolio diversification. If an investor is an expected utility maximizer, then he is risk averse if, and only if, he exhibits a preference for diversification. This paper examines the relationship between risk aversion and portfolio diversification when preferences over probability distributions of wealth do not have an expected utility representation. Although risk aversion is not sufficient to guarantee a preference for portfolio diversification, it is necessary. Quasiconcavity of the preference functional (over probability distributions of wealth), together with risk aversion, does imply a preference for portfolio diversification. Copyright 1989 by The Econometric Society.

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Bibliographic Info

Article provided by Econometric Society in its journal Econometrica.

Volume (Year): 57 (1989)
Issue (Month): 1 (January)
Pages: 163-69

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Handle: RePEc:ecm:emetrp:v:57:y:1989:i:1:p:163-69

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Cited by:
  1. Aldo Montesano, 2008. "Effects of Uncertainty Aversion on the Call Option Market," Theory and Decision, Springer, vol. 65(2), pages 97-123, September.
  2. Alain Chateauneuf & Ghizlane Lakhnati, 2005. "From sure to strong diversification," Cahiers de la Maison des Sciences Economiques b05035, Université Panthéon-Sorbonne (Paris 1).
  3. Paolo Ghirardato & Massimo Marinacci, 2000. "Risk, Ambiguity, and the Separation of Utility and Beliefs," Levine's Working Paper Archive 7616, David K. Levine.
  4. Cerreia-Vioglio, Simone & Maccheroni, Fabio & Marinacci, Massimo & Montrucchio, Luigi, 2012. "Probabilistic sophistication, second order stochastic dominance and uncertainty aversion," Journal of Mathematical Economics, Elsevier, vol. 48(5), pages 271-283.
  5. Alain Chateauneuf & Jean-Marc Tallon, 2000. "Diversification, Convex Preferences and Non-Empty Core," Econometric Society World Congress 2000 Contributed Papers 0751, Econometric Society.
  6. Alon Harel & Zvi Safra & Uzi Segal, 2003. "Ex-Post Egalitarianism," Boston College Working Papers in Economics 563, Boston College Department of Economics.
  7. Safra, Zvi & Segal, Uzi, 1998. "Constant Risk Aversion," Journal of Economic Theory, Elsevier, vol. 83(1), pages 19-42, November.
  8. Duffie, Darrell, 2003. "Intertemporal asset pricing theory," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 11, pages 639-742 Elsevier.

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