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Effects of background risks on cautiousness with an application to a portfolio choice problem. (English) Zbl 1244.91030

Summary: We provide necessary and sufficient conditions on an individual’s expected utility function under which any zero-mean idiosyncratic risk increases cautiousness (the derivative of the reciprocal of the absolute risk aversion), which is the key determinant for this individual’s demand for options and portfolio insurance.

MSC:

91B08 Individual preferences
91B16 Utility theory
91G10 Portfolio theory
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References:

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