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Decreasing Risk Aversion and Mean-Variance Analysis
Larry G. Epstein
Abstract
This paper formulates a set of decreasing-absolute-risk-aversion postulates and shows that only mean-variance utility functionals can satisfy them. These postulates are used to axiomatize specific classes of mean-variance functionals. Finally, an equivalence is established between these postulates and corresponding comparative statics properties of asset demands in two-asset portfolio problems.
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