Article ID: | iaor20052632 |
Country: | Netherlands |
Volume: | 158 |
Issue: | 1 |
Start Page Number: | 229 |
End Page Number: | 242 |
Publication Date: | Oct 2004 |
Journal: | European Journal of Operational Research |
Authors: | Liu Liping |
Keywords: | statistics: general |
In this paper, I re-examine how the mean–variance analysis is consistent with its traditional theoretical foundations, namely, stochastic dominance and the expected utility theory. Then I propose a simplified version of the coarse utility theory as a new foundation. I prove that, by assuming risk aversion and the normality of asset variables, the simplified model is well behaved; indifference curves are convex and the opportunity set is concave. Therefore, there exist global optimal portfolios in the market. Finally, I prove that decision-making in accordance with the simplified model is consistent with the mean–variance analysis.