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Behavior patterns of investment strategies under Roy's safety-first principle

Listed author(s):
  • Li, Zhongfei
  • Yao, Jing
  • Li, Duan
Registered author(s):

    The safety-first principle is a natural motivational factor in decision making, and is closely related to certain popular heuristics such as satisficing. We provide a systematic analysis of optimal portfolio choice under Roy's safety-first principle by examining and comparing the behavior patterns of three popular investment strategies: the optimal constant-rebalanced portfolio, dynamic-rebalanced portfolio and buy-and-hold strategies. Our results indicate the importance of a match between the investment strategy, the investment goal, and the investment horizon. We also develop a geometric approach to investigate the relationships among the safety-first, expected utility, and mean-variance models and offer an explanation for the long-standing debate concerning different patterns of time-diversification effects.

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    File URL: http://www.sciencedirect.com/science/article/pii/S1062-9769(09)00113-6
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    Article provided by Elsevier in its journal The Quarterly Review of Economics and Finance.

    Volume (Year): 50 (2010)
    Issue (Month): 2 (May)
    Pages: 167-179

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    Handle: RePEc:eee:quaeco:v:50:y:2010:i:2:p:167-179
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/620167

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