Abstract
We report a surprising property of μ-σ-preferences: the assumption of nonincreasing relative risk aversion implies the optimal portfolio being riskless. We discuss a solution of that paradox using wealth dependent utility functions in detail. Using the revealed preference theory we show that (general, i.e. not necessary μ-σ) wealth dependent utility functions can be characterized by Wald's axiom.
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Löffler, A. A μ-σ-Risk Aversion Paradox and Wealth Dependent Utility. Journal of Risk and Uncertainty 23, 57–73 (2001). https://doi.org/10.1023/A:1011164615592
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DOI: https://doi.org/10.1023/A:1011164615592