We analyze two robust portfolio selection models, where a mean-variance investor considers possible deviations from a reference distribution of asset returns, adopting a maxmin criterion. The two models differ in the metric used to measure the distance between the reference distribution of asset returns and the alternative probability distributions. In the first model, where relative entropy is used as a measure of distance between distributions, an observational equivalence result obtains, whereby introducing robustness is equivalent to increasing risk aversion and, therefore, the percentage composition of the optimal portfolio of risky assets is equal to that of the optimal portfolio held by an investor without concerns for robustness. In the second model, introducing an alternative measure of distance between distributions, we show that observational equivalence ceases to hold and the proportions between risky assets are altered. We exploit the natural game-theoretic interpretation of the maxmin setting to illustrate the differences between the two models.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
file. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Find related papers by JEL classification: G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.: