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Tempering effects of (dependent) background risks: A mean-variance analysis of portfolio selection

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  • Eichner, Thomas
  • Wagener, Andreas

Abstract

In a mean variance framework, we analyse risk taking in the presence of a (possibly) dependent background risk, exemplified in a linear portfolio selection problem. We first characterise the comparative statics of changes in the distribution and dependence structure of the background risk. For unfair, undesirable and loss-aggravating increases in background risks (both dependent and independent), we then present necessary and sufficient restrictions on preferences such that greater background uncertainty leads to reduced risk taking. With mean-variance preferences, these restrictions boil down to simple conditions on the marginal rate of substitution between risk and return. They can be easily related to familiar notions such as risk vulnerability, properness or standardness.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Mathematical Economics.

Volume (Year): 48 (2012)
Issue (Month): 6 ()
Pages: 422-430

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Handle: RePEc:eee:mateco:v:48:y:2012:i:6:p:422-430

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Web page: http://www.elsevier.com/locate/jmateco

Related research

Keywords: Decision under risk; Risk vulnerability; Properness; Standardness;

References

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Cited by:
  1. Alghalith, Moawia & Guo, Xu & Wong, Wing-Keung & Zhu, Lixing, 2013. "Input Demand under Joint Energy and Output Prices Uncertainties," MPRA Paper 52368, University Library of Munich, Germany.
  2. Guo, Xu & Wong, Wing-Keung & Zhu, Lixing, 2013. "Two-moment decision model for location-scale family with background asset," MPRA Paper 43864, University Library of Munich, Germany.

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