Aspects of Investor Behavior Under Risk
NBER Working Paper No. 1611 (Also Reprint No. r0931)
The three sections of this paper support three related conclusions. First, asset demands with the familiar properties of wealth homogeneity and linearity in expected returns follow as close approximations from expected utility maximizing behavior under the assumptions of constant relative risk aversion and joint normally distributed asset returns. Second, although such asset demands exhibit a symmetric coefficient matrix with respect to the relevant vector of expected asset returns, symmetry is not a general property, and the available empirical evidence warrants rejecting it for both institutional and individual investors in the United States. Finally, in a manner analogous to the finite maximum exhibited by quadratic utility, a broad class of mean-variance utility functions also exhibits a form of wealth satiation which necessarily restricts it range of applicability.
Published: Friedman, Benjamin M. and V. Vance Roley. "Aspects of Investor Behavior Under Risk," Arrow and the Ascent of Modern Economic Theory, ed. by George R. Feiwel. London: MacMillan Press, 1987, pp. 626-653.