Optimal guaranteed return portfolios and the casino effect

This file is part of IDEAS, which uses RePEc data

Optimal guaranteed return portfolios and the casino effect

Author Info

Dert, Cees (Vrije Universiteit Amsterdam, Faculteit der Economische Wetenschappen en Econometrie (Free University Amsterdam, Faculty of Economics Sciences, Business Administration and Economitrics)
Oldenkamp, Bart

Abstract

In this paper, we address the problem of maximizing expected return subject to a worst case return constraint by composing a portfolio that may consist of cash, holdings in a stock market index and options on the index. We derive properties of optimal and feasible portfolios and present a linear programming model to solve the problem. The optimal portfolios have pay-off functions that reflect a gambling policy. We show that optimal solutions to a large class of portfolio models that maximize expected return subject to downside risk constraints are driven by this casino effect and present tractable conditions under which it occurs in our model. We propose to control the casino effect by using chance constraints. Using results from financial theory we formulate an LP model that maximizes expected return subject to worst case return constraints and chance constraints on achieving prespecified levels of return. The results are illustrated with real life data on the S&P 500 index.

Download Info
To download:

If you experience problems downloading a file, check if you have the proper application to view it first. Information about this may be contained in the File-Format links below. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

Publisher Info
Paper provided by VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics in its series Serie Research Memoranda with number 0025.

Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Length:
Date of creation: 1997
Date of revision:
Handle: RePEc:dgr:vuarem:1997-25

Contact details of provider:
Web page: http://www.feweb.vu.nl

For technical questions regarding this item, or to correct its listing, contact: (R. Dam).

Related research
Keywords:

Find related papers by JEL classification:
G23 - Financial Economics - - Financial Institutions and Services - - - Pension Funds; Other Private Financial Institutions

This paper has been announced in the following NEP Reports:

NEP-ALL-2002-03-14 (All new papers)

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

Philip H. Dybvig, 1988. "Inefficient Dynamic Portfolio Strategies or How to Throw Away a Million Dollars in the Stock Market," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 1(1), pages 67-88. [Downloadable!] (restricted)
Other versions:
- Philip H. Dybvig, 1987. "Inefficient Dynamic Portfolio Strategies or How to Throw Away a Million Dollars in the Stock Market," Cowles Foundation Discussion Papers 826R, Cowles Foundation, Yale University, revised Jan 1988. [Downloadable!]

Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

Jón Daníelsson & Bjørn Jorgensen & Casper Vries & Xiaoguang Yang, 2008. "Optimal portfolio allocation under the probabilistic VaR constraint and incentives for financial innovation," Annals of Finance, Springer, vol. 4(3), pages 345-367, July. [Downloadable!] (restricted)
A.B. Berkelaar & R.R.P. Kouwenberg, 2000. "Dynamic asset allocation and downside-risk aversion," Econometric Institute Report 190, Erasmus University Rotterdam, Econometric Institute. [Downloadable!]
Lucas, Andr‚ & Dert, Cees L., 1998. "On the inefficiency of portfolio insurance and caveats to the mean/downside-risk framework," Serie Research Memoranda 0057, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics. [Downloadable!]

Statistics

Access and download statistics

Did you know? RePEc and its associated services are free for contributors and users, and do not accept any advertising.

This page was last updated on 2009-12-9.

This information is provided to you by IDEAS at the Department of Economics, College of Liberal Arts and Sciences, University of Connecticut using RePEc data on a server sponsored by the Society for Economic Dynamics.