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Portfolio selection and duality under mean variance preferences

  • Eichner, Thomas
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    This paper uses duality to analyze an investor's behavior in a n-asset portfolio selection problem when the investor has mean variance preferences. The indirect utility and wealth requirement functions are used to derive Roy's identity, Shephard's lemma and the Slutsky equation. In our simple Slutsky equation the income effect is characterized by decreasing absolute risk aversion (DARA) and the substitution effect is always positive [negative] with respect to an asset's holding if the asset's mean return [risk] increases. Substitution effect and income effect work in the same direction presupposed mean variance preferences display DARA.

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    Article provided by Elsevier in its journal Insurance: Mathematics and Economics.

    Volume (Year): 48 (2011)
    Issue (Month): 1 (January)
    Pages: 146-152

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    Handle: RePEc:eee:insuma:v:48:y:2011:i:1:p:146-152
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505554

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