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Diversified behavioral portfolio as an alternative to Modern Portfolio Theory

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  • Rodríguez, Yeny E.
  • Gómez, Juan M.
  • Contreras, Javier

Abstract

The traditional mean–variance approach has been complemented by alternative theories that use risk measures different from standard deviation of returns or involve additional distributional features of returns like skewness and kurtosis. We propose a portfolio choice model that combines different distributional characteristics of the returns in the decision-making making process, considering preferences of investors which are modeled as non-statistical uncertainties of investors using fuzzy theory. We use 20 stocks of the S&P500 from January 2013 to December 2017. We assess the obtained portfolios’ performance, and the diversified behavioral portfolios outperform than the mean–variance portfolio. This methodological proposal can be seen as a strong managerial tool to make investment portfolio decisions.

Suggested Citation

  • Rodríguez, Yeny E. & Gómez, Juan M. & Contreras, Javier, 2021. "Diversified behavioral portfolio as an alternative to Modern Portfolio Theory," The North American Journal of Economics and Finance, Elsevier, vol. 58(C).
    • Handle: RePEc:eee:ecofin:v:58:y:2021:i:c:s1062940821001273
    DOI: 10.1016/j.najef.2021.101508
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    2. Zhang, Cheng & Gong, Xiaomin & Zhang, Jingshu & Chen, Zhiwei, 2023. "Dynamic portfolio allocation for financial markets: A perspective of competitive-cum-compensatory strategy," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 84(C).
    3. Vukovic, Darko B. & Maiti, Moinak & Frömmel, Michael, 2022. "Inflation and portfolio selection," Finance Research Letters, Elsevier, vol. 50(C).

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    More about this item

    Keywords

    Behavioral risk; Portfolio management; Risk tolerance; Fuzzy optimization; Diversification;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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