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Portfolio selection and portfolio frontier with background risk

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  • Huang, Hung-Hsi
  • Wang, Ching-Ping
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    Abstract

    This 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 Info

    Article provided by Elsevier in its journal The North American Journal of Economics and Finance.

    Volume (Year): 26 (2013)
    Issue (Month): C ()
    Pages: 177-196

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    Handle: RePEc:eee:ecofin:v:26:y:2013:i:c:p:177-196

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    Web page: http://www.elsevier.com/locate/inca/620163

    Related research

    Keywords: Background risk; Portfolio selection; Portfolio frontier; Two-fund separation; Zero-Beta CAPM;

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    Cited by:
    1. Gustavo A. Marrero & Luis A. Puch & Francisco J. Ramos-Real, 2013. "Mean-variance portfolio methods for energy policy risk management," Documentos de Trabajo del ICAE 2013-41, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.

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