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The Geometry of Separation and Myopia

Published online by Cambridge University Press:  19 October 2009

M. J. Brennan  and
A. Kraus
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Extract

In recent years a number of papers have been concerned with the determination of necessary and sufficient conditions for portfolio separation and for myopia. As a result of these earlier investigations, it is known that a necessary and sufficient condition both for portfolio separation and for myopia is that the investor's utility function exhibit risk tolerance, that is a linear function of wealth. What is lacking in the existing literature is a clear demonstration of the economic relevance of linear risk tolerance for portfolio separation and myopia. It is hoped that this paper will help to fill the gap by an analysis of separation and myopia using the standard tools of price theory: indifference curves, budget lines, and Engel curves. Viewed in this perspective, a substantial part of the analysis can be amplified and clarified in terms of the geometry of the situation.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 11 , Issue 2 , June 1976 , pp. 171 - 193
Copyright
Copyright © School of Business Administration, University of Washington 1976

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References

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