CFDP 859

Increases in Risk Aversion and Portfolio Choice in a Complete Market


Publication Date: February 1988

Pages: 10


This note examines the effect of changes in risk aversion on the optimal portfolio choice in a complete market. It is shown that an agent who is less risk averse in the Pratt (1964) sense than another will choose a portfolio whose payoff is distributed as the other’s payoff plus a nonnegative random variable plus conditional-mean-zero noise. The proof of the result uses simple first order conditions and basic results from stochastic dominance.


Investments, Portfolio theory, Stochastic dominance, Risk aversion, Complete markets

JEL Classification Codes:  313, 311