Risk and Utility in Portfolio Optimization
| Autor: | Vincent D. Natoli, Morrel H. Cohen |
|---|---|
| Rok vydání: | 2002 |
| Předmět: |
Statistics and Probability
Empirical data Statistical Mechanics (cond-mat.stat-mech) Computer science Gaussian FOS: Physical sciences Marginal value Condensed Matter Physics FOS: Economics and business symbols.namesake Portfolio Management (q-fin.PM) Econometrics symbols Portfolio Probability distribution Portfolio optimization Volatility (finance) Condensed Matter - Statistical Mechanics Quantitative Finance - Portfolio Management Modern portfolio theory |
| DOI: | 10.48550/arxiv.cond-mat/0212187 |
| Popis: | Modern portfolio theory(MPT) addresses the problem of determining the optimum allocation of investment resources among a set of candidate assets. In the original mean-variance approach of Markowitz, volatility is taken as a proxy for risk, conflating uncertainty with risk. There have been many subsequent attempts to alleviate that weakness which, typically, combine utility and risk. We present here a modification of MPT based on the inclusion of separate risk and utility criteria. We define risk as the probability of failure to meet a pre-established investment goal. We define utility as the expectation of a utility function with positive and decreasing marginal value as a function of yield. The emphasis throughout is on long investment horizons for which risk-free assets do not exist. Analytic results are presented for a Gaussian probability distribution. Risk-utility relations are explored via empirical stock-price data, and an illustrative portfolio is optimized using the empirical data. Comment: 10 pages, 1 figure, presented at 2002 Conference on Econophysics in Bali Indonesia |
| Databáze: | OpenAIRE |
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