Portfolio selection and portfolio frontier with background risk
AbstractThis study analyzes individual portfolio selection in the presence of background risk. Under the expected utility framework, this study determines necessary and sufficient conditions of utility functions for two-fund monetary separation with independently additive and multiplicative background risks, respectively. Under a mean–variance framework, this study analyzes the portfolio frontier characteristic given dependently additive background risk. The main findings include the two-fund separation property, portfolio frontier shapes, and a portfolio variance comparison between situations with and without background risk and Zero-Beta CAPM. In particular, the portfolio frontier constructed from n risky assets plus one riskless asset is analogous with only n risky assets.
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Bibliographic InfoArticle provided by Elsevier in its journal The North American Journal of Economics and Finance.
Volume (Year): 26 (2013)
Issue (Month): C ()
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Web page: http://www.elsevier.com/locate/inca/620163
Background risk; Portfolio selection; Portfolio frontier; Two-fund separation; Zero-Beta CAPM;
Find related papers by JEL classification:
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
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