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Utilitarianism and fairness in portfolio positioning

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  • de Palma, André
  • Prigent, Jean-Luc

Abstract

The paper introduces the theory of optimal positioning of financial products. It is illustrated in the context of long-term intertemporal portfolio allocation and can be applied for example to asset allocation funds. We embed this problem in location theory: the portfolio is optimized within the investors'risk aversion dimension. For the CRRA utility functions, we compute explicitly the distance functions. For the first (utilitarian criterion), the average utility of the investors is maximized. For the second one (fairness criterion), the choice of portfolio is optimized so that the average monetary loss due to the lack of customization is minimized. Given the distribution of investors' risk aversion, we provide a solution method and an algorithm to optimally position standardized portfolio along one of these two criteria.

Suggested Citation

  • de Palma, André & Prigent, Jean-Luc, 2008. "Utilitarianism and fairness in portfolio positioning," Journal of Banking & Finance, Elsevier, vol. 32(8), pages 1648-1660, August.
    • Handle: RePEc:eee:jbfina:v:32:y:2008:i:8:p:1648-1660
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    2. Yu, Bosco Wing-Tong & Pang, Wan Kai & Troutt, Marvin D. & Hou, Shui Hung, 2009. "Objective comparisons of the optimal portfolios corresponding to different utility functions," European Journal of Operational Research, Elsevier, vol. 199(2), pages 604-610, December.
    3. Mkaouar, Farid & Prigent, Jean-Luc & Abid, Ilyes, 2017. "Long-term investment with stochastic interest and inflation rates: The need for inflation-indexed bonds," Economic Modelling, Elsevier, vol. 67(C), pages 228-247.
    4. Ilyes Abid & Stéphane Goutte & Farid Mkaouar & Khaled Guesmi, 2019. "Optimal strategy between extraction and storage of crude oil," Annals of Operations Research, Springer, vol. 281(1), pages 3-26, October.
    5. M’hamed Gaïgi & Stéphane Goutte & Idris Kharroubi & Thomas Lim, 2021. "Optimal risk management problem of natural resources: application to oil drilling," Annals of Operations Research, Springer, vol. 297(1), pages 147-166, February.
    6. Kamma, Thijs & Pelsser, Antoon, 2022. "Near-optimal asset allocation in financial markets with trading constraints," European Journal of Operational Research, Elsevier, vol. 297(2), pages 766-781.
    7. Bertrand, Philippe & Prigent, Jean-luc, 2019. "On the optimality of path-dependent structured funds: The cost of standardization," European Journal of Operational Research, Elsevier, vol. 277(1), pages 333-350.
    8. Amédée-Manesme, Charles-Olivier & Barthélémy, Fabrice & Prigent, Jean-Luc, 2016. "Real estate investment: Market volatility and optimal holding period under risk aversion," Economic Modelling, Elsevier, vol. 58(C), pages 543-555.
    9. Fabrice Barthelemy & Jean-Luc Prigent, 2011. "Real Estate Portfolio Management : Optimization under Risk Aversion," THEMA Working Papers 2011-12, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
    10. Thijs Kamma & Antoon Pelsser, 2019. "Near-Optimal Dynamic Asset Allocation in Financial Markets with Trading Constraints," Papers 1906.12317, arXiv.org, revised Oct 2019.
    11. André de Palma & Nathalie Picard & Jean-Luc Prigent, 2010. "Eliciting Utility for (Non)Expected Utility Preferences Using Invariance Transformations," Working Papers hal-00517726, HAL.
    12. André de Palma & Nathalie Picard & Jean-Luc Prigent, 2009. "Prise en compte de l'attitude face au risque dans le cadre de la directive MiFID," Working Papers hal-00418892, HAL.
    13. Castaneda, Pablo & Rudolph, Heinz P., 2011. "Upgrading investment regulations in second pillar pension systems : a proposal for Colombia," Policy Research Working Paper Series 5775, The World Bank.

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