### Constructing a Risky Density Function

**. It is well known that risk increases the value of options. This paper makes that precise in a new way. The conventional theorem says that the value of an option does not fall if the underlying option becomes riskier in the conventional sense of the mean-preserving spread. This paper uses two new definitions of ``riskier'' to show that the value of an option strictly increases (a) if the underlying asset becomes ``pointwise riskier,'' and (b) only if the underlying asset becomes ``extremum riskier.'' Paper in tex or pdf ( http://www.rasmusen.org/published/Rasmusen07-RFS-options.pdf).**

**"When Does Extra Risk Strictly Increase the Value of Options?"***The Review of Financial Studies,*20(5): 1647-1667 (September 2007)To view the post on a separate page, click: at 9/25/2009 02:06:00 PM (the permalink).

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