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Limiting losses may be injurious to your wealth

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  • Grauer, Robert R.

Abstract

Theory tells us that if return distributions are independent over time, an expected utility maximizing logarithmic-utility investor will almost surely accumulate the most long-run wealth. This paper examines the robustness of the result. Specifically, it examines the expected and unexpected long-run and short-run consequences of imposing Value at Risk and other loss constraints on power-utility investors with a numerical example and empirically in an asset-allocation setting covering the 1934–2008 period. In addition, it examines the expected and unexpected long-run consequences of imposing Conditional Value at Risk constraints on power-utility and prospect-theory (kinked linear-utility) investors.

Suggested Citation

  • Grauer, Robert R., 2013. "Limiting losses may be injurious to your wealth," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 5088-5100.
    • Handle: RePEc:eee:jbfina:v:37:y:2013:i:12:p:5088-5100
    DOI: 10.1016/j.jbankfin.2013.07.047
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    More about this item

    Keywords

    Power-utility and prospect-theory portfolios; Solvency; Portfolio-insurance; Value-at-risk and conditional-value-at-risk constraints;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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