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A Simple Model of Robust Portfolio Selection

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Author Info
Taboga, Marco

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Abstract

We propose a single-period portfolio selection model which allows the decision maker to easily deal with uncertainty about the distribution of asset returns. The model is preference-based and relies upon a separate parametrization of risk aversion and ambiguity aversion. A particular specification of preferences allows us to solve the portfolio selection problem and obtain a simple closed-form expression for the portfolio weights, which lends itself to a straightforward economic interpretation.

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File URL: http://mpra.ub.uni-muenchen.de/16472/
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Publisher Info
Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 16472.

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Date of creation: 01 Jun 2004
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Handle: RePEc:pra:mprapa:16472

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Related research
Keywords: Portfolio selection; robustness; ambiguity.;

Find related papers by JEL classification:
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics

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  1. Raman Uppal & Tan Wang, 2003. "Model Misspecification and Underdiversification," Journal of Finance, American Finance Association, vol. 58(6), pages 2465-2486, December. [Downloadable!] (restricted)
  2. Dow, James & Werlang, Sergio Ribeiro da Costa, 1992. "Uncertainty Aversion, Risk Aversion, and the Optimal Choice of Portfolio," Econometrica, Econometric Society, vol. 60(1), pages 197-204, January. [Downloadable!] (restricted)
  3. Peter Klibanoff & Massimo Marinacci & Sujoy Mukerji, 2002. "A smooth model of decision making under ambiguity," ICER Working Papers - Applied Mathematics Series 11-2003, ICER - International Centre for Economic Research, revised Apr 2003. [Downloadable!]
    Other versions:
  4. Pascal J. Maenhout, 2004. "Robust Portfolio Rules and Asset Pricing," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 17(4), pages 951-983. [Downloadable!] (restricted)
  5. Green, Richard C & Hollifield, Burton, 1992. " When Will Mean-Variance Efficient Portfolios Be Well Diversified?," Journal of Finance, American Finance Association, vol. 47(5), pages 1785-809, December. [Downloadable!] (restricted)
    Other versions:
  6. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November. [Downloadable!] (restricted)
  7. Zengjing Chen & Larry Epstein, 2002. "Ambiguity, Risk, and Asset Returns in Continuous Time," Econometrica, Econometric Society, vol. 70(4), pages 1403-1443, July. [Downloadable!] (restricted)
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  8. Klein, Roger W. & Bawa, Vijay S., 1976. "The effect of estimation risk on optimal portfolio choice," Journal of Financial Economics, Elsevier, vol. 3(3), pages 215-231, June. [Downloadable!] (restricted)
  9. Epstein, Larry G & Wang, Tan, 1994. "Intertemporal Asset Pricing Under Knightian Uncertainty," Econometrica, Econometric Society, vol. 62(2), pages 283-322, March. [Downloadable!] (restricted)
  10. Nicholas Barberis, 2000. "Investing for the Long Run when Returns Are Predictable," Journal of Finance, American Finance Association, vol. 55(1), pages 225-264, 02. [Downloadable!] (restricted)
  11. Barry, Christopher B, 1974. "Portfolio Analysis under Uncertain Means, Variances, and Covariances," Journal of Finance, American Finance Association, vol. 29(2), pages 515-22, May. [Downloadable!] (restricted)
  12. Rustem, Berc & Becker, Robin G. & Marty, Wolfgang, 2000. "Robust min-max portfolio strategies for rival forecast and risk scenarios," Journal of Economic Dynamics and Control, Elsevier, vol. 24(11-12), pages 1591-1621, October. [Downloadable!] (restricted)
  13. Krasker, William S, 1982. " Minimax Behavior in Portfolio Selection," Journal of Finance, American Finance Association, vol. 37(2), pages 609-14, May. [Downloadable!] (restricted)
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