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Estimating Probabilities Relevant to Calculating Relative Risk-Corrected Returns of Alternative Portfolios

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  • Samuelson, Paul A

Abstract

In making all-or-none choices between alternative securities, Samuelson (1997) suggested that investors of different risk-aversion should calculate from past samples of those securities their relevant Harmonic Means, or Geometric means, or other associative means representative of their respective degrees of relative-risk-aversion. Here it is shown how this learning procedure can be improved upon when you have prior knowledge that the securities have log-Normal distributions. Classical estimation theory, concerning consistent, efficient, and sufficient statistics, is shown to have a cash value by means of the calculable measure of (ex ante) "risk-corrected certainty equivalents." Needed qualifications and testings are also presented. Copyright 1997 by Kluwer Academic Publishers

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  • Samuelson, Paul A, 1997. "Estimating Probabilities Relevant to Calculating Relative Risk-Corrected Returns of Alternative Portfolios," Journal of Risk and Uncertainty, Springer, vol. 15(3), pages 191-200, December.
    • Handle: RePEc:kap:jrisku:v:15:y:1997:i:3:p:191-200
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