Mean-Variance Preferences and Investor Behavior

25 Pages Posted: 30 Jan 2001

See all articles by Michael B. Ormiston

Michael B. Ormiston

Arizona State University (ASU) - Economics Department

Edward E. Schlee

Arizona State University

Multiple version iconThere are 2 versions of this paper

Date Written: December 2000

Abstract

We study the comparative statics implications of mean-variance preferences for optimal portfolios. Specifically, we show that all risk averse mean-variance investors raise their investment in a risky asset in response to a change in that asset's return distribution if and only if the change lowers both the mean and standard-deviation of the return by the same percentage. Thus, raising the mean while keeping the standard deviation constant or lowering the standard deviation while keeping the mean constant will not increase investment for all mean-variance investors. If, however, we truncate the distribution from above in such a way that the mean and standard deviation fall by the same percentage, then investment does increase for all risk averse mean-variance investors. Besides being of interest in its own right, our result allows us to compare the comparative statics implications of the expected utility and mean-variance models systematically.

Keywords: Mean-variance, portfolios, comparative statics

JEL Classification: D81, G11

Suggested Citation

Ormiston, Michael B. and Schlee, Edward E., Mean-Variance Preferences and Investor Behavior (December 2000). Available at SSRN: https://ssrn.com/abstract=256198 or http://dx.doi.org/10.2139/ssrn.256198

Michael B. Ormiston (Contact Author)

Arizona State University (ASU) - Economics Department ( email )

Tempe, AZ 85287-3806
United States
602-965-7350 (Phone)
602-965-0748 (Fax)

Edward E. Schlee

Arizona State University ( email )

Box 873806
Tempe, AZ 85287-3806
United States
480-965-5745 (Phone)
480-965-0748 (Fax)

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