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Portfolio choice beyond the traditional approach

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  • Francisco Penaranda
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    Abstract

    This paper surveys asset allocation methods that extend the traditional approach. An important feature of the traditional approach is that measures the risk and return tradeoff in terms of mean and variance of final wealth. However, there are also other important features that are not always made explicit in terms of investor’s wealth, information, and horizon: The investor makes a single portfolio choice based only on the mean and variance of her final financial wealth and she knows the relevant parameters in that computation. First, the paper describes traditional portfolio choice based on four basic assumptions, while the rest of the sections extend those assumptions. Each section will describe the corresponding equilibrium implications in terms of portfolio advice and asset pricing.

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    File URL: http://eprints.lse.ac.uk/24481/
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    Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 24481.

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    Length: 51 pages
    Date of creation: Mar 2007
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    Handle: RePEc:ehl:lserod:24481

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    Keywords: Mean-Variance analysis; Background risks; Estimation error; Expected utility; Multi-period portfolio choice.;

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