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The compensation portfolio

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  • Uhl, Matthias W.
  • Rohner, Philippe

Abstract

We successfully show that it is possible to optimize both for risk and for asset allocation without compromising the optimization of individual goals by introducing the novel concept of a compensation portfolio. Therefore, we solve for the global vs. local optimization paradox by bridging Modern Portfolio Theory (MPT) and Behavioral Portfolio Theory (BPT).

Suggested Citation

  • Uhl, Matthias W. & Rohner, Philippe, 2018. "The compensation portfolio," Finance Research Letters, Elsevier, vol. 27(C), pages 60-64.
    • Handle: RePEc:eee:finlet:v:27:y:2018:i:c:p:60-64
    DOI: 10.1016/j.frl.2018.02.023
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    References listed on IDEAS

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    1. JULES H. Van BINSBERGEN & MICHAEL W. BRANDT & RALPH S. J. KOIJEN, 2008. "Optimal Decentralized Investment Management," Journal of Finance, American Finance Association, vol. 63(4), pages 1849-1895, August.
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    4. Elton, Edwin J. & Gruber, Martin J., 2004. "Optimum Centralized Portfolio Construction with Decentralized Portfolio Management," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 39(3), pages 481-494, September.
    5. Sharpe, W F, 1981. "Decentralized Investment Management," Journal of Finance, American Finance Association, vol. 36(2), pages 217-234, May.
    6. Enrico Giorgi & Thorsten Hens, 2006. "Making prospect theory fit for finance," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 20(3), pages 339-360, September.
    7. Enrico Giorgi & Thorsten Hens & János Mayer, 2007. "Computational aspects of prospect theory with asset pricing applications," Computational Economics, Springer;Society for Computational Economics, vol. 29(3), pages 267-281, May.
    8. Antoni Bosch-Domènech & Joaquim Silvestre, 2006. "Reflections on gains and losses: A 2 × 2 × 7 experiment," Journal of Risk and Uncertainty, Springer, vol. 33(3), pages 217-235, December.
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    Cited by:

    1. Fahim Ullah & Samad M. E. Sepasgozar & Changxin Wang, 2018. "A Systematic Review of Smart Real Estate Technology: Drivers of, and Barriers to, the Use of Digital Disruptive Technologies and Online Platforms," Sustainability, MDPI, vol. 10(9), pages 1-44, September.

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    More about this item

    Keywords

    Optimization; Goal-based investing; Compensation portfolio;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G40 - Financial Economics - - Behavioral Finance - - - General
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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