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The Mean and Variance of the Mean-Variance Decision Rule

Author

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  • James A. Chalfant
  • Robert N. Collender
  • Shankar Subramanian

Abstract

The widely used mean-variance approach to decisions under uncertainty requires estimates of the parameters of the joint distribution of returns. When optimal behavior is determined using estimates, rather than the true values, the decision is a random variable. We consider the reliability of mean-variance analysis by examining the bias and variance-covariance matrix for the decision vector. The latter shows that decisions based on estimated parameters can have a large variance around the true optimum. The results show that optimal decisions can differ substantially from those based on mean-variance analysis.

Suggested Citation

  • James A. Chalfant & Robert N. Collender & Shankar Subramanian, 1990. "The Mean and Variance of the Mean-Variance Decision Rule," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 72(4), pages 966-974.
    • Handle: RePEc:oup:ajagec:v:72:y:1990:i:4:p:966-974.
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    File URL: http://hdl.handle.net/10.2307/1242628
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    Citations

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    Cited by:

    1. Sergio H. Lence & Dermot J. Hayes, 1994. "The Empirical Minimum-Variance Hedge," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 76(1), pages 94-104.
    2. Pautsch, Gregory R. & Babcock, Bruce A. & Breidt, F. Jay, 1999. "Optimal Information Acquisition Under A Geostatistical Model," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 24(2), pages 1-25, December.
    3. Collender, Robert N., 1988. "Normative Economics under Uncertainty and Risk Aversion: The Land Allocation Problem Revisited," Department of Economics and Business - Archive 259432, North Carolina State University, Department of Economics.
    4. Wang, Xuecai & Dorfman, Jeffrey H. & McKissick, John & Turner, Steven C., 2001. "Optimal Marketing Decisions for Feeder Cattle under Price and Production Risk," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 33(3), pages 431-443, December.
    5. Nelson, Carl H. & Ndjeunga, Jupiter, 1997. "Elliptical Symmetry, Expected Utility, And Mean-Variance Analysis," ACE Reports 14795, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics.
    6. Kim, Jae-Gyeong, 1993. "Futures markets in an open economy," ISU General Staff Papers 1993010108000011461, Iowa State University, Department of Economics.
    7. Rahman, Shaikh Mahfuzur & Dorfman, Jeffrey H. & Turner, Steven C., 2004. "A Bayesian Approach to Optimal Cross-Hedging of Cottonseed Products Using Soybean Complex Futures," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 29(2), pages 1-16, August.
    8. Lien, Gudbrand & Hardaker, J. Brian & Asseldonk, Marcel A.P.M. van & Richardson, James W., 2009. "Risk programming and sparse data: how to get more reliable results," Agricultural Systems, Elsevier, vol. 101(1-2), pages 42-48, June.
    9. Boussard, Jean-Marc, 1996. "When risk generates chaos," Journal of Economic Behavior & Organization, Elsevier, vol. 29(3), pages 433-446, May.
    10. Babcock, Bruce A. & Choi, E. Kwan & Feinerman, Eli, 1993. "Risk And Probability Premiums For Cara Utility Functions," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 18(1), pages 1-8, July.
    11. Boussard, Jean-Marc, 1997. "A Risk Generated Non-Linear Cobweb," 1997 Occasional Paper Series No. 7 198193, International Association of Agricultural Economists.
    12. Lence, Sergio H. & Hayes, Dermot J., 1995. "Land Allocation In The Presence Of Estimation Risk," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 20(1), pages 1-15, July.
    13. Gregory R. Pautsch & Bruce A. Babcock & F. Jay Breidt, 1998. "Optimal Sampling Under a Geostatistical Model," Center for Agricultural and Rural Development (CARD) Publications 98-wp200, Center for Agricultural and Rural Development (CARD) at Iowa State University.
    14. Gudbrand Lien & J. Hardaker & Marcel Asseldonk & James Richardson, 2011. "Risk programming analysis with imperfect information," Annals of Operations Research, Springer, vol. 190(1), pages 311-323, October.
    15. Tomek, William G. & Peterson, Hikaru Hanawa, 2000. "Risk Management In Agricultural Markets: A Survey," 2000 Producer Marketing and Risk Management Conference, January 13-14, Orlando, FL 19580, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).

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