Risk Aversion and Portfolio Selection in a Continuous-Time Model

Abstract

The comparative statics of the optimal portfolios across individuals is carried out for the Black–Scholes market model. It turns out that the indirect utility functions inherit the order of risk aversion (in the Arrow–Pratt sense) from the von Neumann–Morgenstern utility functions, and therefore, a more risk-averse agent would invest less wealth (in absolute value) in the risky asset.