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Bliss Points in Mean-Variance Portfolio Models

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  • David S. Jones
  • V. Vance Roley

Abstract

When all financial assets have risky returns, the mean-variance portfolio model is potentially subject to two types of bliss points. One bliss point arises when a von Neumann-Morgenstern utility function displays negative marginal utility for sufficiently large end-of-period wealth, such as in quadratic utility. The second type of bliss point involves satiation in terms of beginning-of-period wealth and afflicts many commonly used mean-variance preference functions. This paper shows that the two types of bliss points are logically independent of one another and that the latter places the effective constraint on an investor's welfare. The paper also uses Samuelson's Fundamental Approximation Theorem to motivate a particular mean-variance portfolio choice model which is not affected by either type of bliss point.

Suggested Citation

  • David S. Jones & V. Vance Roley, 1981. "Bliss Points in Mean-Variance Portfolio Models," NBER Technical Working Papers 0019, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberte:0019
    Note: ME
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    Cited by:

    1. Benjamin M. Friedman & V. Vance Roley, 1985. "Aspects of Investor Behavior Under Risk," NBER Working Papers 1611, National Bureau of Economic Research, Inc.

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