Linear Risk Tolerance and Mean-Variance Utility Functions
نویسنده
چکیده
The concept of linear risk tolerance is transferred from the expected utility framework to the two-parameter, mean-variance approach. We show how the requirement of a hyperbolical Arrow-Pratt index translates from the EU-approach into a condition on the marginal rate of substitution between return and risk in the two-parameter approach. As a spin-off from this translation, we derive a specific class of functional forms for twoparameter utility functions. JEL-classification: D81, D21.
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