THE COMPARATIVE STATICS OF CHANGES IN RISK REVISITED

In this paper, we consider the problem of determining the conditions under which a change in risk increases the optimal value of a decision variable for all risk-averse agents. For a large class of payoff functions, we obtain the least constraining (necessary and sufficient) condition on the change in risk for signing its effect without any additional restriction on the utility function than risk aversion. It entails all existing sufficient conditions as particular cases. Our results are applied to the linear model which describes the standard portfolio problem. The necessary and sufficient condition for unambiguous comparative statics in this class of problems is termed ''greater central riskiness'' (CR). It is shown that CR dominance is neither stronger nor weaker than second-degree stochastic dominance. (C) 1995 Academic Press, Inc.