Is Higher Variance Necessarily Bad for Investment?
7 Pages Posted: 2 May 2012
Date Written: May 2, 2012
Abstract
We consider decision-making under risk in which random events affect the value of the portfolio multiplicatively, rather than additively. In this case, a higher variability in the rate of return not only is associated with a higher risk, a bad property, but also engenders a higher expected return, a good property. As a result, some expected utility maximizing investors, those with low risk aversion, will prefer a higher variance of the rate of return over a lower one. Implications are considered.
Keywords: risk, uncertainty, portfolio choice
JEL Classification: D81, G11, D31
Suggested Citation: Suggested Citation
Yitzhaki, Shlomo and Lambert, Peter J., Is Higher Variance Necessarily Bad for Investment? (May 2, 2012). Available at SSRN: https://ssrn.com/abstract=2049704 or http://dx.doi.org/10.2139/ssrn.2049704
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