Comparison of Mean-Variance and Exact Utility Maximization in Stock Portfolio Selection
AbstractIn the early 50's, Markowitz introduced the modern portfolio selection theory which, to this very day, constitutes the basis of many investment decisions. Given different correlated assets, how does an investor create a portfolio maximizing the expected utility? Markowitz's contribution was to show that an investor might do very well, relying only on the means and variances/covariances of the assets, which simplifies the portfolio selection tremendously. The validity of the mean-variance approximation to exact utility maximization has been verified, but only in the unrealistic case of choosing among 10-20 securities. This paper examines how well the quadratic approximation works in a larger allocation problem, where investors characterized by different utility functions can choose among nearly 120 securities. The effects of more aggressive investment strategies are also investigated, allowing for limited short selling and the inclusion of synthetic options in the security set.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. 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.
Bibliographic InfoPaper provided by Lund University, Department of Economics in its series Working Papers with number 2001:4.
Length: 15 pages
Date of creation: 30 Mar 2001
Date of revision:
Contact details of provider:
Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund,Sweden
Phone: +46 +46 222 0000
Fax: +46 +46 2224613
Web page: http://www.nek.lu.se/en
More information through EDIRC
optimization; expected utility; skewness; options;
Find related papers by JEL classification:
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
This paper has been announced in the following NEP Reports:
- NEP-ALL-2001-04-11 (All new papers)
- NEP-FIN-2001-04-11 (Finance)
- NEP-FMK-2001-04-11 (Financial Markets)
You can help add them by filling out this form.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (David Edgerton).
If references are entirely missing, you can add them using this form.