IDEAS home Printed from https://ideas.repec.org/a/wsi/afexxx/v18y2023i01ns2010495222500300.html
   My bibliography  Save this article

The Mean-Variance Rule for Investors with Reverse S-Shaped Utility

Author

Listed:
  • Wing-Keung Wong

    (Department of Finance, Fintech Center and Big Data Research Center, Asia University, Taichung City, Taiwan2Department of Medical Research, China Medical University Hospital, Taichung City, Taiwan3Department of Economics and Finance, Hang Seng University of Hong Kong, Hong Kong)

  • David Yeung

    (SRS Consortium for Advanced Study, Shue Yan University, Hong Kong5Center of Game Theory, St Petersburg State University, Russia6Department of Finance, Asia University, Taichung City, Taiwan)

  • Richard Lu

    (Department of Risk Management and Insurance, Feng Chia University, Taichung City, Taiwan)

Abstract

Our paper contributes to the literature by developing the theory of the mean-variance (MV) rules for investors with reverse S-shaped utility. To do so, we first introduce the definition of the MV rule for investors with reverse S-shaped utility. We then set up the conjecture on the preference for different prospects by using the new MV rule that they could get a higher expected utility for the preferred asset under some conditions. Thereafter, we look for the conditions that the conjecture could hold and construct a theorem for this purpose by showing that when the negative (positive) parts of the assets follow one (another) type of location-scale family or the linear combination of location-scale families, then the preferences of the assets is the same as those by using an expected utility for the investors with reverse S-shaped utility. We then extend the theory by developing some properties of portfolio diversification by using the new MV rule. The theory developed in our paper enables academics and practitioners to apply the theory developed in this paper to analyze some important empirical issues and draw inferences on the preferences of investors with reverse S-shaped utility.

Suggested Citation

  • Wing-Keung Wong & David Yeung & Richard Lu, 2023. "The Mean-Variance Rule for Investors with Reverse S-Shaped Utility," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 18(01), pages 1-16, March.
    • Handle: RePEc:wsi:afexxx:v:18:y:2023:i:01:n:s2010495222500300
    DOI: 10.1142/S2010495222500300
    as

    Download full text from publisher

    File URL: http://www.worldscientific.com/doi/abs/10.1142/S2010495222500300
    Download Restriction: Access to full text is restricted to subscribers
    File URL: https://libkey.io/10.1142/S2010495222500300?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    More about this item

    Keywords

    Stochastic dominance; the mean-variance rules; expected-utility maximization; risk aversion; risk-seeking; investment behaviors; investors with reverse S-shaped utility;
    All these keywords.

    JEL classification:

    • C00 - Mathematical and Quantitative Methods - - General - - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wsi:afexxx:v:18:y:2023:i:01:n:s2010495222500300. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Tai Tone Lim (email available below). General contact details of provider: http://www.worldscinet.com/afe/afe.shtml .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.