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Comment: “Safety First–An Expected Utility Principle”

Published online by Cambridge University Press:  19 October 2009

Nicolas Gressis  and
William A. Remaley
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Extract

Prior to 1952 there was no analytical theory available that would satisfactorily explain the well-known phenomenon of asset diversification by investors. Although the portfolio selection criteria of Markowitz [3] and that of Roy [5] both explain diversification, they are based on very different objectives. The objective of Markowitz's approach is to select the portfolio of securities that maximizes the expected utility of the investor, i.e., the EV criterion. The objective of Roy's approach is economic survival through selection of the portfolio that minimizes the probability of disaster, i.e., the safety-first (SF) criterion.

Type
Communications
Information
Journal of Financial and Quantitative Analysis , Volume 9 , Issue 6 , December 1974 , pp. 1057 - 1061
Copyright
Copyright © School of Business Administration, University of Washington 1974

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References

REFERENCES

[1]Levy, H., and Sarnat, M.. “Safety First - An Expected Utility Principle.” Journal of Financial and Quantitative Analysis, vol. 7, no. 3 (June 1972), pp. 1829–1834.CrossRefGoogle Scholar
[2]Lintner, J. “Security Price, Risk and Maximal Gains from Diversification.” Journal of Finance, December 1965, pp. 587–615.Google Scholar
[3]Markowitz, H. M. “Portfolio Selection.” The Journal of Finance, vol. 6, no. 1 (March 1952), pp. 77–91.Google Scholar
[4]Merton, R. C. “An Analytic Derivation of the Efficient Portfolio Frontier.” Journal of Financial and Quantitative Analysis, September 1972, pp. 1851–1872.CrossRefGoogle Scholar
[5]Roy, A. “Safety First and the Holding of Assets.” Econometrica, vol. 20, no. 3 (July 1952), pp. 431–449.CrossRefGoogle Scholar
[6]Sharpe, W. F. “Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk.” Journal of Finance, September 1964, pp. 425–442.Google Scholar
[7]Smith, K. V.Portfolio Management: Theoretical and Empirical Studies of Portfolio Decision-Making. New York: Holt, Rinehart and Winston, Inc., 1971.Google Scholar