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Two-moment decision model for location-scale family with background asset

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  • Guo, Xu
  • Wong, Wing-Keung
  • Zhu, Lixing

Abstract

This 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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File URL: http://mpra.ub.uni-muenchen.de/43864/
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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 43864.

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Date of creation: 15 Jan 2013
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Handle: RePEc:pra:mprapa:43864

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Keywords: Mean-variance model; indifference curve; location-scale family; background risk; utility function; risk aversion; risk seeking;

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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.

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