In the standard portfolio problem, a shift in the distribution of the risky asset is ``portfolio-dominated'' if it reduces the demand for the risky asset by all risk-averse agents, whatever the riskfree rate. We show that the condition obtained by Landsberger and Meilijson [1993] (while necessary) is not sufficient for portfolio dominance and we present the exact necessary and sufficient condition for portfolio dominance. It is shown that, if the comparative statics property holds for any concave utility functions that are piecewise linear with two kinks, it also holds for the set of all concave utility functions. Portfolio dominance is stronger than second-degree stochastic dominance, but weaker than the monotone likelihood ratio order. We also show that the monotone likelihood ratio order is necessary and sufficient to yield the same unambiguous comparative statics property for a larger class of (nonlinear) payoff functions.
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Paper provided by Risk and Insurance Archive in its series Working Papers with number
014.
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Dionne, Georges & Eeckhoudt, Louis & Gollier, Christian, 1993.
"Increases in Risk and Linear Payoffs,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(2), pages 309-19, May.
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