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- Title
Optimal portfolio choice when utility depends on health.
- Authors
Edwards, Ryan D.
- Abstract
This paper examines optimal portfolio choice when health can change the shape of the utility function. If adverse health shocks threaten to increase the marginal utility of consumption, that is, if they are Edgeworth–Pareto substitutes, risky health prompts individuals to lower their risky portfolio shares. Health naturally becomes more uncertain with age, so this theory might help to explain why aging investors gradually decrease their risk exposure even when asset returns display no mean reversion and relative risk aversion is constant.
- Subjects
CONSUMPTION (Economics); PORTFOLIO management (Investments); MARGINAL utility; UTILITY functions; INVESTORS; RISK management in business
- Publication
International Journal of Economic Theory, 2010, Vol 6, Issue 2, p205
- ISSN
1742-7355
- Publication type
Article
- DOI
10.1111/j.1742-7363.2010.00131.x