Portfolio Selection with Quadratic Utility Revisited

Considering a simple portfolio selection problem by agents with quadratic utility, an apparently counterintuitive outcome results. When such a choice is over two assets that can be ordered in terms of riskiness, an agent that is more risk averse may optimally invest a larger portion of wealth in the riskier asset. It is shown that such an outcome is not counterintuitive, since for the portfolios from which agents optimally choose, a larger proportion of investment in the riskier asset leads to a less risky portfolio. The Geneva Papers on Risk and Insurance Theory (2004) 29, 137–144. doi:10.1023/B:GEPA.0000046566.50332.5b