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Uncertainty Aversion and Convexity in Portfolio Choice

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  • Dong, Xueqi

Abstract

This note studies the implication of the general notion of uncertainty aversion (Schmeidler 1989) on the problem of portfolio choice, which involves allocating the proportions of fixed capital to several assets. We prove that if an investor is both risk averse and uncertainty averse, then preference in a portfolio space is convex. This result means that the convexity in a portfolio choice problem can be guaranteed without restricting preference representation to a particular functional form.

Suggested Citation

  • Dong, Xueqi, 2021. "Uncertainty Aversion and Convexity in Portfolio Choice," MPRA Paper 108264, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:108264
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    References listed on IDEAS

    as
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    4. Fabio Maccheroni & Massimo Marinacci & Aldo Rustichini, 2006. "Ambiguity Aversion, Robustness, and the Variational Representation of Preferences," Econometrica, Econometric Society, vol. 74(6), pages 1447-1498, November.
    5. ,, 2016. "Objective rationality and uncertainty averse preferences," Theoretical Economics, Econometric Society, vol. 11(2), May.
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    7. Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April.
    8. Christian Gollier, 2011. "Portfolio Choices and Asset Prices: The Comparative Statics of Ambiguity Aversion," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 78(4), pages 1329-1344.
    9. Peter Bossaerts & Paolo Ghirardato & Serena Guarnaschelli & William R. Zame, 2010. "Ambiguity in Asset Markets: Theory and Experiment," The Review of Financial Studies, Society for Financial Studies, vol. 23(4), pages 1325-1359, April.
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    More about this item

    Keywords

    Convexity; Portfolio Choice; Ambiguity; Uncertainty Aversion; Risk Aversion;
    All these keywords.

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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