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Mean‐Gini, Portfolio Theory, and the Pricing of Risky Assets
Author(s) -
SHALIT HAIM,
YITZHAKI SHLOMO
Publication year - 1984
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1984.tb04917.x
Subject(s) - stochastic dominance , econometrics , economics , portfolio , valuation (finance) , gini coefficient , risk aversion (psychology) , variance (accounting) , mathematics , statistics , actuarial science , financial economics , inequality , expected utility hypothesis , finance , mathematical analysis , accounting , economic inequality
This paper presents the mean‐Gini (MG) approach to analyze risky prospects and construct optimum portfolios. The proposed method has the simplicity of a mean‐variance model and the main features of stochastic dominance efficiency. Since mean‐Gini is consistent with investor behavior under uncertainty for a wide class of probability distributions, Gini's mean difference is shown to be more adequate than the variance for evaluating the variability of a prospect. The MG approach is then applied to capital markets and the security valuation theorem is derived as a general relationship between average return and risk. This is further extended to include a degree of risk aversion that can be estimated from capital market data. The analysis is concluded with the concentration ratio to allow for the classification of different securities with respect to their relative riskiness.