Portfolio Dominance and Mean-Preserving Increases in Risk

Abstract

We characterize the class of mean-preserving changes in risk which causes all risk averse investors to reduce their risky investment in the classic two asset portfolio problem. We show that a risk change is in this class if and only if it is a mean-preserving increase in risk which can be approximated by a sequence of mean-preserving three-atom spreads with one of the three atoms being zero.

Keywords: increasing risk, mean-preserving spread, three-atom spread, portfolio dominance

JEL Classification: G11, D81