October 30, 2003
Mean-Variance Analysis
Step 1 is to construct indifference curves from our utility-based valuation of risk.
The fourth panel on the handout can be expressed as:
We use some basic results from statistics to construct the agent's budget constraint.
Putting this all together we have a diagram showing the optimal portfolio.
A risk-neutral agent does not fit this analysis. His indifference curves are horizontal lines.
Posted by bparke at 12:04 PM