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Comparisons and Characterizations of the Mean-Variance, Mean-VaR, Mean-CVaR Models for Portfolio Selection With Background Risk

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  • Xu, Guo
  • Wing-Keung, Wong
  • Lixing, Zhu

Abstract

This paper investigates the impact of background risk on an investor’s portfolio choice in a mean-VaR, mean-CVaR and mean-variance framework, and analyzes the characterizations of the mean-variance boundary and mean-VaR efficient frontier in the presence of background risk. We also consider the case with a risk-free security.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 51827.

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Date of creation: 01 Dec 2013
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Handle: RePEc:pra:mprapa:51827

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Keywords: Background risk; Portfolio selection; VaR; CVaR;

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  1. Thomas Eichner & Andreas Wagener, 2003. "Variance Vulnerability, Background Risks, and Mean-Variance Preferences," The Geneva Risk and Insurance Review, Palgrave Macmillan, vol. 28(2), pages 173-184, December.
  2. Thomas Eichner, 2008. "Mean Variance Vulnerability," Management Science, INFORMS, vol. 54(3), pages 586-593, March.
  3. Heaton, John & Lucas, Deborah, 2000. "Portfolio Choice in the Presence of Background Risk," Economic Journal, Royal Economic Society, vol. 110(460), pages 1-26, January.
  4. Pelizzon, Loriana & Weber, Guglielmo, 2009. "Efficient portfolios when housing needs change over the life cycle," Journal of Banking & Finance, Elsevier, vol. 33(11), pages 2110-2121, November.
  5. Das, Sanjiv & Markowitz, Harry & Scheid, Jonathan & Statman, Meir, 2010. "Portfolio Optimization with Mental Accounts," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 45(02), pages 311-334, April.
  6. Edwards, Ryan D, 2008. "Health Risk and Portfolio Choice," Journal of Business & Economic Statistics, American Statistical Association, vol. 26, pages 472-485.
  7. Samuelson, Paul A, 1969. "Lifetime Portfolio Selection by Dynamic Stochastic Programming," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 239-46, August.
  8. Harvey S. Rosen & Stephen Wu, 2003. "Portfolio Choice and Health Status," NBER Working Papers 9453, National Bureau of Economic Research, Inc.
  9. Buly A Cardak & Roger K. Wilkins, 2008. "The Determinants of Household Risky Asset Holdings: Australian Evidence on Background Risk and Other Factors#," Working Papers 2008.05, School of Economics, La Trobe University.
  10. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, 03.
  11. Merton, Robert C, 1969. "Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 247-57, August.
  12. Joao F. Cocco, 2005. "Portfolio Choice in the Presence of Housing," Review of Financial Studies, Society for Financial Studies, vol. 18(2), pages 535-567.
  13. Guo, Xu & Wong, Wing-Keung & Zhu, Lixing, 2013. "An analysis of portfolio selection with multiplicative background risk," MPRA Paper 51331, University Library of Munich, Germany.
  14. Baptista, Alexandre M., 2008. "Optimal delegated portfolio management with background risk," Journal of Banking & Finance, Elsevier, vol. 32(6), pages 977-985, June.
  15. Berkowitz, Michael K. & Qiu, Jiaping, 2006. "A further look at household portfolio choice and health status," Journal of Banking & Finance, Elsevier, vol. 30(4), pages 1201-1217, April.
  16. Shum, Pauline & Faig, Miquel, 2006. "What explains household stock holdings?," Journal of Banking & Finance, Elsevier, vol. 30(9), pages 2579-2597, September.
  17. Fan, Elliott & Zhao, Ruoyun, 2009. "Health status and portfolio choice: Causality or heterogeneity?," Journal of Banking & Finance, Elsevier, vol. 33(6), pages 1079-1088, June.
  18. Fatma Lajeri-Chaherli, 2002. "More on Properness: The Case of Mean-Variance Preferences," The Geneva Risk and Insurance Review, Palgrave Macmillan, vol. 27(1), pages 49-60, June.
  19. R. C. Merton, 1970. "Optimum Consumption and Portfolio Rules in a Continuous-time Model," Working papers 58, Massachusetts Institute of Technology (MIT), Department of Economics.
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