TY - JOUR
AU - Jones,David S.
AU - Roley,V. Vance
TI - Bliss Points in Mean-Variance Portfolio Models
JF - National Bureau of Economic Research Technical Working Paper Series
VL - No. 19
PY - 1981
Y2 - December 1981
DO - 10.3386/t0019
UR - http://www.nber.org/papers/t0019
L1 - http://www.nber.org/papers/t0019.pdf
N1 - Author contact info:
David S. Jones
Federal Reserve Board
20th and Constitution Avenue, NW
Washington, DC 20551
Tel: NA
V. Vance Roley
Department of Finance/DJ-10
Graduate School of Business
University of Washington
Seattle, WA 98195
Tel: 206/545-7476
E-Mail: vroley@u.washington.edu
AB - When all financial assets have risky returns, the mean-variance portfolio model is potentially subject to two types of bliss points. One bliss point arises when a von Neumann-Morgenstern utility function displays negative marginal utility for sufficiently large end-of-period wealth, such as in quadratic utility. The second type of bliss point involves satiation in terms of beginning-of-period wealth and afflicts many commonly used mean-variance preference functions. This paper shows that the two types of bliss points are logically independent of one another and that the latter places the effective constraint on an investor's welfare. The paper also uses Samuelson's Fundamental Approximation Theorem to motivate a particular mean-variance portfolio choice model which is not affected by either type of bliss point.
ER -