On the Use of a Covariance Function in a Portfolio Model

Abstract

In the analysis of problems of choice under uncertainty, many results depend on the investigator's ability to determine the signs of certain integrals. A recently derived method of doing this—christened the “covariance method” by Batra [2]—demonstrates that, in certain cases, recognition of the fact that the integrals involved are composed of covariance terms can provide a simple and elegant solution to the problem. This paper uses a simple portfolio model to demonstrate that these covariance terms can be exploited to obtain other useful results as well.