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Optimal Portfolio Allocation under Higher Moments

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  • Eric Jondeau
  • Michael Rockinger

Abstract

"We evaluate how departure from normality may affect the allocation of assets. A Taylor series expansion of the expected utility allows to focus on certain moments and to compute the optimal portfolio allocation numerically. A decisive advantage of this approach is that it remains operational even for a large number of assets. While the mean-variance criterion provides a good approximation of the expected utility maximisation under moderate non-normality, it may be ineffective under large departure from normality. In such cases, the three-moment or four-moment optimisation strategies may provide a good approximation of the expected utility". Copyright Blackwell Publishers Ltd, 2006.

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Bibliographic Info

Article provided by European Financial Management Association in its journal European Financial Management.

Volume (Year): 12 (2006)
Issue (Month): 1 ()
Pages: 29-55

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Handle: RePEc:bla:eufman:v:12:y:2006:i:1:p:29-55

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