Is Higher Variance Necessarily Bad for Investment?

7 Pages Posted: 2 May 2012

See all articles by Shlomo Yitzhaki

Shlomo Yitzhaki

Hebrew University of Jerusalem - Department of Economics; National Bureau of Economic Research (NBER)

Peter J. Lambert

University of Oregon - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

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

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

Shlomo Yitzhaki (Contact Author)

Hebrew University of Jerusalem - Department of Economics ( email )

Mount Scopus
Jerusalem, 91905
Israel
+972 2 659 2201 (Phone)
+972 2 652 2319 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Peter J. Lambert

University of Oregon - Department of Economics ( email )

Eugene, OR 97403
United States

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Register to save articles to
your library

Register

Paper statistics

Downloads
61
Abstract Views
539
rank
349,408
PlumX Metrics