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The Effects of Shifts in a Return Distribution on Optimal Portfolios
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The Effects of Shifts in a Return Distribution on Optimal Portfolios

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  • Hadar, Josef
  • Seo, Tae Kun

Abstract

When the distribution of the returns of a risky asset undergoes a stochastically dominating shift, a risk-averse investor may not necessarily increase the investment in that asset. This paper provides restrictions on the investor's utility function that are necessary and sufficient for a dominating shift to bring about no decrease in the investment in the respective asset if there are two risky assets in the portfolio. These conditions are also necessary if there are n > 2 assets, and are necessary and sufficient if the utility function exhibits constant absolute risk aversion. Copyright 1990 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Suggested Citation

  • Hadar, Josef & Seo, Tae Kun, 1990. "The Effects of Shifts in a Return Distribution on Optimal Portfolios," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(3), pages 721-736, August.
    • Handle: RePEc:ier:iecrev:v:31:y:1990:i:3:p:721-36
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