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Portfolio choice and risk

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  • Encarnacion, Jose Jr.

Abstract

Risk aversion and the riskiness of assets are interpreted in terms of a model of portfolio choice where the maximand is conditional on the probability of satisfying a minimum constraint on the future value of the portfolio. It is a consequence that the riskiness of the average asset in the portfolio increases with wealth, and when expected value is the maximand, low-risk low-return assets are inferior goods. The model also gives straightforward explanations of the Allais paradox and other puzzling patterns of choice under risk.
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Suggested Citation

  • Encarnacion, Jose Jr., 1991. "Portfolio choice and risk," Journal of Economic Behavior & Organization, Elsevier, vol. 16(3), pages 347-353, December.
    • Handle: RePEc:eee:jeborg:v:16:y:1991:i:3:p:347-353
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