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A closed-form mean–variance–skewness portfolio strategy

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  • Zhen, Fang
  • Chen, Jingnan

Abstract

This paper analyzes portfolio selection problems with multivariate normal-gamma distributed risky returns. We obtain a partial elliptic cone-shaped mean–variance–skewness (MVS) frontier and a closed-form MVS portfolio strategy for investors with a cubic utility function. We show that the utility improvement and Sharpe ratio loss of our MVS strategy relative to the traditional mean–variance strategy depend on the investor’s prudence and risk-aversion levels, and the mean and variance of a max-skewness portfolio. Moreover, we obtain a three-moment capital asset pricing model, and propose a max-skewness factor in addition to the market factor.

Suggested Citation

  • Zhen, Fang & Chen, Jingnan, 2022. "A closed-form mean–variance–skewness portfolio strategy," Finance Research Letters, Elsevier, vol. 47(PB).
    • Handle: RePEc:eee:finlet:v:47:y:2022:i:pb:s1544612322001957
    DOI: 10.1016/j.frl.2022.102933
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    Cited by:

    1. Liu, Weilong & Zhang, Yong & Liu, Kailong & Quinn, Barry & Yang, Xingyu & Peng, Qiao, 2023. "Evolutionary multi-objective optimisation for large-scale portfolio selection with both random and uncertain returns," QBS Working Paper Series 2023/02, Queen's University Belfast, Queen's Business School.
    2. Carnero, M. Angeles & León, Angel & Ñíguez, Trino-Manuel, 2023. "Skewness in energy returns: estimation, testing and retain-->implications for tail risk," The Quarterly Review of Economics and Finance, Elsevier, vol. 90(C), pages 178-189.

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    More about this item

    Keywords

    Asymmetry; Normal-gamma distribution; Mean–variance–skewness frontier; Portfolio strategy; Three-moment capital asset pricing model;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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