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Limiting losses may be injurious to your wealth

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  • Grauer, Robert R.
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    Abstract

    Theory tells us that if return distributions are independent over time, an expected utility maximizing logarithmic-utility investor will almost surely accumulate the most long-run wealth. This paper examines the robustness of the result. Specifically, it examines the expected and unexpected long-run and short-run consequences of imposing Value at Risk and other loss constraints on power-utility investors with a numerical example and empirically in an asset-allocation setting covering the 1934–2008 period. In addition, it examines the expected and unexpected long-run consequences of imposing Conditional Value at Risk constraints on power-utility and prospect-theory (kinked linear-utility) investors.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 37 (2013)
    Issue (Month): 12 ()
    Pages: 5088-5100

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    Handle: RePEc:eee:jbfina:v:37:y:2013:i:12:p:5088-5100

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    Web page: http://www.elsevier.com/locate/jbf

    Related research

    Keywords: Power-utility and prospect-theory portfolios; Solvency; Portfolio-insurance; Value-at-risk and conditional-value-at-risk constraints;

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