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Is higher variance necessarily bad for investment?

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  • Shlomo Yitzhaki
  • Peter Lambert

Abstract

We consider decision-making under risk in which random events affect the value of the portfolio multiplicatively, rather than additively. In this case, a higher variability in the rate of return not only is associated with a higher risk, a bad property, but also engenders a higher expected return, a good property. As a result, certain expected utility maximizing investors, namely those with the lowest risk aversion, will prefer some portfolios with higher variances in the rate of return over others with lower ones. This is demonstrated, and implications are considered. Copyright Springer Science+Business Media New York 2014

Suggested Citation

  • Shlomo Yitzhaki & Peter Lambert, 2014. "Is higher variance necessarily bad for investment?," Review of Quantitative Finance and Accounting, Springer, vol. 43(4), pages 855-860, November.
    • Handle: RePEc:kap:rqfnac:v:43:y:2014:i:4:p:855-860
    DOI: 10.1007/s11156-013-0395-3
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    Cited by:

    1. Gleb Gersman & Haim Shalit, 2014. "Optimizing MCSD Portfolios," Working Papers 1410, Ben-Gurion University of the Negev, Department of Economics.
    2. Lambert, Peter J. & Yitzhaki, Shlomo, 2015. "Accounting for variability in the growth rate of income," Economics Letters, Elsevier, vol. 129(C), pages 71-73.
    3. Betül Çal & Mary Lambkin, 2017. "Brand equity of stock exchange as a mediator in financial decisions," Journal of Financial Services Marketing, Palgrave Macmillan, vol. 22(1), pages 14-23, March.
    4. Zeeshan Ahmed & Shahid Rasool & Qasim Saleem & Mubashir Ali Khan & Shamsa Kanwal, 2022. "Mediating Role of Risk Perception Between Behavioral Biases and Investor’s Investment Decisions," SAGE Open, , vol. 12(2), pages 21582440221, May.
    5. Shlomo Yitzhaki, 2015. "Gini’s mean difference offers a response to Leamer’s critique," METRON, Springer;Sapienza Università di Roma, vol. 73(1), pages 31-43, April.
    6. Abu Elnasr E. Sobaih & Ibrahim A. Elshaer, 2023. "Risk-Taking, Financial Knowledge, and Risky Investment Intention: Expanding Theory of Planned Behavior Using a Moderating-Mediating Model," Mathematics, MDPI, vol. 11(2), pages 1-17, January.

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    More about this item

    Keywords

    Risk; Uncertainty; Portfolio choice; D81; G11; D31;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution

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