Pure higher-order effects in the portfolio choice model

- This paper studies the optimal solution of the standard portfolio choice model.
- A higher-order solution for the optimal share of wealth invested in risky assets is derived.
- The optimal solution depends on higher-order risk attitudes and distributional moments.
- Empirical evidence for the US shows that the higher-order effects are relevant but moderate.

This paper examines the effects of higher-order risk attitudes and statistical moments on the optimal allocation of risky assets within the standard portfolio choice model. We derive the expressions for the optimal proportion of wealth invested in the risky asset to show they are functions of portfolio returns third- and fourth-order moments as well as on the investor's risk preferences of prudence and temperance. We illustrate the relative importance that the introduction of those higher-order effects have in the decision of expected utility maximizers using data for the US.