Private Risk
Name
4316-03.pdf
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228.14 KB
Format
Adobe PDF
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dea84e600a4d8fa992ffb85b18333745
Author(s)
Kaufman, Gordon M.
Mattar, Mahdi
Date Issued
June 27, 2003
Series/Report no.
MIT Sloan School of Management Working Paper;4316-03
Abstract
We extend the traditional decision analytic approach to calculation of the buying
(selling) price of a lottery by allowing a risk averse (risk prone) decision maker to
rebalance his financial portfolio in the course of determination of these prices. Building
on the classical portfolio allocation problem in complete markets, we generalize the
standard treatment to include both traded and non-traded unique risks. Our principal
focus is on private risks-risks that are not tradable or traded in financial markets. We
show that allowing portfolio rebalancing in a distributive bargaining setting with risk
averse negotiators expands the zone of possible agreement [ZOPA] relative to the
ZOPA yielded when rebalancing is not allowed.
Subjects
Private Risks
Portfolio Rebalancing
Persistent DSpace Link
