Document Type

Working paper

Source Publication


Publication Date



Expected utility theory; first-order conditional dependent risk aversion; background risk; risk diversification


In the literature, utility functions in the expected utility class are generically limited to second-order (conditional) risk aversion, while non-expected utility functions can exhibit either. First-order or second-order (conditional) risk aversion. This paper extends the concepts of orders of conditional risk aversion to orders of conditional dependent risk aversion. We show that first-order conditional dependent risk aversion is consistent with the framework of the expected utility hypothesis. We relate our results to risk diversification and provide additional insights into its application in different economic and finance examples.

Publisher Statement

Copyright © Dionne, Li and CIRRELT, 2011.

Access to external full text or publisher's version may require subscription.

Full-text Version

Publisher’s Version

Recommended Citation

Dionne, G., & Li, J. (2011). First-order (conditional) risk aversion, backround risk and risk diversification (CIRRELT-2011-24). Canada: CIRRELT. Retrieved from

Included in

Economics Commons