Mean-Variance Preferences

sreeharimenon · November 27th, 2011, 11:05 pm

Hi All,The E(u(R))=E(R-(gamma/2)R^2=E(R)+(gamma/2)E(R)^2-(gamma/2)V(R). Prove that E(u(R)) for R is N(mu, sigma^2) is increasing in mu and decreasing in sigma^2.Now if we dont consider all utility functions to be differentiable, how do we prove this.Thanks and RegardsSreehari

sreeharimenon · November 28th, 2011, 2:03 pm

sreeharimenon · November 28th, 2011, 2:05 pm

Hi AllPlease help in shedding some light. If the utility functions are differentiable it seems easy to prove it. If not, it seems so complicated. RegsSreehari

Alan · November 29th, 2011, 3:25 pm

It's kind of an interesting problem, and I'm sure you can look it up. If you haven't done that yet,I think the first step is to define exactly the assumed properties of u(R).