Is Higher Variance Necessarily Bad for Investment?

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