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Convexity in Portfolio Choice under Ambiguity

Dong, Xueqi (2021): Convexity in Portfolio Choice under Ambiguity.

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Abstract

This paper studies the implication of the Uncertainty Aversion Axiom of Schmeidler (1989) on the problem of portfolio choice under ambiguity, which involves allo- cating the proportions of an initial wealth to several assets of unknown probability distributions. Our main result shows that if an investor is risk averse and conforms to the uncertainty aversion axiom, then preference under ambiguity in a portfolio space is convex. This means that the convexity in a portfolio choice problem can be guaranteed without restricting preference representation to a particular functional form.

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