The main objective of this paper is to show that a fourth degree polynomial utility function proposed in a recent paper, which meets the requirement of risk aversion, can be restricted further to meet the added requirement of decreasing absolute risk aversion. Secondary objectives are to show the features and advantages of the proposed function.
Get full access to this article
View all access options for this article.
References
1.
AliMukhtar M.“Probability and Utility Estimates for Racetrack Bettors.”Journal of Political Economy85, 4 (August 1977), pp. 803–815.
2.
ArdirtiFred D.“Risk and the Required Return on Equity.”Journal of Finance22, 1 (March 1967), pp. 19–36.
3.
ArrowKenneth J.“The Theory of Risk Aversion.”Essays in the Theory of Risk Bearing.Chicago: Markham Publishing Company, 1971, pp. 90–120.
4.
BenishayHaskel“More Weight to the Friedman-Savage Hypothesis: A Note.”Journal of Accounting, Auditing and Finance. Scheduled for Vol. 4, no. 4, October 1989.
5.
BenishayHaskel“A Fourth-Degree Polynomial Utility Function and Its Implications for Investors' Responses Toward Four Moments of the Wealth Distribution.”Journal of Accounting, Auditing and Finance2, 3 (New Series Summer 1987), pp. 203–238.
6.
BenishayHaskel“Market Preference for Characteristics of Common Stocks.”Economic Journal83 (March 1973), pp. 173–191.
7.
BenishayHaskel“Variability in Earnings-Price Ratios of Corporate Equities.”American Economic Review51 (March 1961), pp. 81–94.
8.
BowerRichard S.BowerDorothy H.“Risk and the Valuation of Common Stock.”Journal of Political Economy77, 3 (May-June 1969), pp. 349–362.
9.
FriedmanMiltonSavageLawrence J.“The Utility of Choices Involving Risk.”The Journal of Political EconomyLVI, 4 (August 1948), pp. 219–304.
10.
GregoryNathaniel“Relative Wealth and Risk Taking: A Short Note on the Friedman-Savage Utility Function.”Journal of Political Economy88, 6 (December 1980), pp. 1226–1230.
11.
HanochGioraLevyHaim“Efficient Portfolio Selection with Quadratic and Cubic Utility.”Journal of Business43, 2 (April 1970), pp. 181–189.
12.
HawawiniGabriel A.“An Analytical Examination of the Intervaling Effect on Skewness and Other Moments.”Journal of Financial and Quantitative Analysis15, 5 (December 1980), pp. 1121–1127.
13.
JeanWilliam“The Extension of Portfolio Analysis to Three or More Parameters.”Journal of Financial and Quantitative Analysis6, 1 (January 1971), pp. 505–515.
14.
KaneAlex“Skewness Preference and Portfolio Choice.”Journal of Financial and Quantitative Analysis17, 1 (March 1982), pp. 15–25.
15.
KaplanskyIrving“A Common Error Concerning Kurtosis.”Journal of the American Statistical Association40, 230 (June 1945), p. 259.
16.
KrausAlanLitzenbergerRobert“On the Distributional Conditions for a Consumption-oriented Three Moment CAPM.”The Journal of Finance38, 5 (December 1984), pp. 1381–1391.
17.
KrollYoramLevyHaimMarkowitzHarry“Mean-Variance Versus Direct Utility Maximization.”Journal of Finance39, 1 (March 1984), pp. 47–61.
18.
LevyHaim“A Utility Function Depending on the First Three Moments and Comment.”Journal of Finance24, 4 (September 1969), pp. 715–720.
19.
LevyH.MarkowitzH. M.“Approximating Expected Utility by a Function of Mean and Variance.”The American Economic Review69, 3 (June 1979), pp. 308–317.
20.
MarkowitzHarry“The Utility of Wealth.”Journal of Political Economy60, 2 (April 1952), pp. 151–158.
21.
MosesRonald P.“More Weight to the Friedman-Savage Hypothesis: A Comment.”Journal of Accounting, Auditing and Finance Scheduled for Vol. 4, no. 4, October 1989.
22.
PrattJohn W.“Risk Aversion in the Small and in the Large.”Econometrica32, 1–2. (January-April 1964), pp. 122–136.
23.
PryorFrederic L.“The Friedman-Savage Utility Function in Cross-cultural Perspective.”Journal of Political Economy84, 4 (August 1976), pp. 821–834.
24.
PulleyLawrence B.“A General Mean Variance Approximation to Expected Utility for Short Holding Periods.”Journal of Financial and Quantitative Analysis16, 3 (September 1981), pp. 361–373.
25.
RubensteinMark E.“The Fundamental Theorem of Parameter Preference Security Valuation.”Journal of Financial and Quantitative Analysis8, 1 (January 1973), pp. 61–69.
26.
ScottRobert C.HorvathPhillip A.“On the Direction of Preference for Moments of Higher Order Than the Variance.”The Journal of Finance35, 4 (September 1980), pp. 915–919.
27.
SimkowitzMichael A.BeedlesWilliam“Diversification in a Three Moment World.”Journal of Financial and Quantitative Analysis13, 4 (December 1978), pp. 927–941.
28.
SmithKeith V.“The Effect of Intervaling on Estimating Parameters of the Capital Asset Pricing Model.”Journal of Financial and Quantitative Analysis13, 2 (June 1978), pp. 313–332.
29.
TehranianHassan“Empirical Studies in Portfolio Performance Using Higher Degrees of Stochastic Dominance.”The Journal of Finance25, 1, (March 1980), pp. 159–171.
30.
Von NeumannJ.MorgensternOskarTheory of Games and Economic Behavior.First Edition1944, Second Edition 1947, Third Edition 1953. Princeton University Press.
31.
YuleG. U.KendallG.An Introduction to the Theory of Statistics.Fourteenth Edition.New York: Hafner Publishing Company, 1950.