One-period asset allocation oddity with loss aversion utility

Abstract This study considers a one-period asset allocation problem where the economy contains one riskless asset and only one risky asset. We show that the asset allocation is very odd and violates the investment practice for a typical loss aversion utility; that is, the possible investment proportions in risky asset include only zero, positive infinity and negative infinity. This result implies that the conventional increasing and concave utility is more suitable in explaining the practical one-period asset allocation behavior than the typical loss aversion utility.