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Private Risk
Gordon M. Kaufman Massachusetts Institute of Technology (MIT) - Sloan School of Management Mahdi Mattar Massachusetts Institute of Technology (MIT) - Center for Technology, Policy, and Industrial Development (CTPID) June 2003 MIT Sloan Working Paper No. 4316-03 Abstract: We extend the traditional decision analytic approach to calculation of the buying (selling) price of a lottery by allowing a risk averse (risk prone) decision maker to rebalance his financial portfolio in the course of determination of these prices. Building on the classical portfolio allocation problem in complete markets, we generalize the standard treatment to include both traded and non-traded unique risks. Our principal focus is on private risks - risks that are not tradable or traded in financial markets. We show that allowing portfolio rebalancing in a distributive bargaining setting with risk averse negotiators expands the zone of possible agreement [ZOPA] relative to the ZOPA yielded when rebalancing is not allowed.
Keywords: Private Risks, Portfolio Rebalancing Working Paper SeriesDate posted: June 18, 2003 ; Last revised: July 15, 2003Suggested CitationContact Information
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