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A Simple Model of Robust Portfolio Selection

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  • Taboga, Marco

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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Bibliographic 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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Keywords: Portfolio selection; robustness; ambiguity.;

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References

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  1. Nicholas Barberis, 2000. "Investing for the Long Run when Returns Are Predictable," Journal of Finance, American Finance Association, American Finance Association, vol. 55(1), pages 225-264, 02.
  2. Green, Richard C & Hollifield, Burton, 1992. " When Will Mean-Variance Efficient Portfolios Be Well Diversified?," Journal of Finance, American Finance Association, American Finance Association, vol. 47(5), pages 1785-809, December.
  3. Pascal J. Maenhout, 2004. "Robust Portfolio Rules and Asset Pricing," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 17(4), pages 951-983.
  4. Peter Klibanoff & Massimo Marinacci & Sujoy Mukerji, 2005. "A Smooth Model of Decision Making under Ambiguity," Econometrica, Econometric Society, Econometric Society, vol. 73(6), pages 1849-1892, November.
  5. Zengjing Chen & Larry Epstein, 2002. "Ambiguity, Risk, and Asset Returns in Continuous Time," Econometrica, Econometric Society, Econometric Society, vol. 70(4), pages 1403-1443, July.
  6. Barry, Christopher B, 1974. "Portfolio Analysis under Uncertain Means, Variances, and Covariances," Journal of Finance, American Finance Association, American Finance Association, vol. 29(2), pages 515-22, May.
  7. Frankfurter, George M. & Phillips, Herbert E. & Seagle, John P., 1971. "Portfolio Selection: The Effects of Uncertain Means, Variances, and Covariances," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 6(05), pages 1251-1262, December.
  8. Uppal, Raman & Wang, Tan, 2002. "Model Misspecification and Under-Diversification," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3304, C.E.P.R. Discussion Papers.
  9. Klein, Roger W. & Bawa, Vijay S., 1976. "The effect of estimation risk on optimal portfolio choice," Journal of Financial Economics, Elsevier, Elsevier, vol. 3(3), pages 215-231, June.
  10. Dow, James & Werlang, Sergio Ribeiro da Costa, 1992. "Uncertainty Aversion, Risk Aversion, and the Optimal Choice of Portfolio," Econometrica, Econometric Society, Econometric Society, vol. 60(1), pages 197-204, January.
  11. 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, Elsevier, vol. 24(11-12), pages 1591-1621, October.
  12. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, Econometric Society, vol. 46(6), pages 1429-45, November.
  13. Krasker, William S, 1982. " Minimax Behavior in Portfolio Selection," Journal of Finance, American Finance Association, American Finance Association, vol. 37(2), pages 609-14, May.
  14. Ravi Jagannathan & Tongshu Ma, 2002. "Risk Reduction in Large Portfolios: Why Imposing the Wrong Constraints Helps," NBER Working Papers 8922, National Bureau of Economic Research, Inc.
  15. Epstein, Larry G & Wang, Tan, 1994. "Intertemporal Asset Pricing Under Knightian Uncertainty," Econometrica, Econometric Society, Econometric Society, vol. 62(2), pages 283-322, March.
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