State Preference Theory Approach.

Transcript

State preference and mean-variance approaches are common to use for estimating risky assets under uncertainty. In this paper, firstly mean variance and state preference approaches are examined in terms of axioms, assumptions and consideration of characteristics of utility functions, especially logarithmic utility function. Secondly, based on the argument of Kraus and Litzenberger (1975), some theoretical methods will be provided to prove that mean variance approach is considered as a special case of state preference approach. Lastly, the paper discusses the pros and cons of both approaches.