Two-moment decision model for location-scale family with background asset
AbstractThis paper studies the impact of background risk on the indifference curve. We first study the shape of the indifference curves for the investment with background risk for risk averters, risk seekers, and risk-neutral investors. Thereafter, we study the comparative statics of the change in the shapes of the indifference curves when the means and the standard deviations of the returns of the financial asset and/or the background asset change. In addition, we draw inference on risk vulnerability and investment decisions in financial crises and bull and bear markets.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 43864.
Date of creation: 15 Jan 2013
Date of revision:
Mean-variance model; indifference curve; location-scale family; background risk; utility function; risk aversion; risk seeking;
Find related papers by JEL classification:
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- C0 - Mathematical and Quantitative Methods - - General
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