An info-gap approach to managing portfolios of assets with uncertain returns
Purpose - The purpose of this paper is to provide a quantitative methodology based on information-gap decision theory for dealing with (true) Knightian uncertainty in the management of portfolios of assets with uncertain returns. Design/methodology/approach - Portfolio managers aim to maximize returns for given levels of risk. Since future returns on assets are uncertain the expected return on a portfolio of assets can be subject to significant uncertainty. Information-gap decision theory is used to construct portfolios that are robust against uncertainty. Findings - Using the added dimensions of aspirational parameters and performance requirements in information-gap theory, the paper shows that one cannot simultaneously have two robust-optimal portfolios that outperform a specified return and a benchmark portfolio unless one of the portfolios has arbitrarily large long and short positions. Research limitations/implications - The paper has considered only one uncertainty model and two performance requirements in an information-gap analysis over a particular time frame. Alternative uncertainty models could be introduced and benchmarking against proxy portfolios and competitors are examples of additional performance requirements that could be incorporated in an information-gap analysis. Practical implications - An additional methodology for applying information-gap modeling to portfolio management has been provided. Originality/value - This paper provides a new and novel approach for managing portfolios in the face of uncertainties in future asset returns.
Volume (Year): 10 (2009)
Issue (Month): 3 (May)
|Contact details of provider:|| Web page: http://www.emeraldinsight.com|
|Order Information:|| Postal: Emerald Group Publishing, Howard House, Wagon Lane, Bingley, BD16 1WA, UK|
Web: http://emeraldgrouppublishing.com/products/journals/journals.htm?id=jrf Email:
When requesting a correction, please mention this item's handle: RePEc:eme:jrfpps:v:10:y:2009:i:3:p:277-287. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Virginia Chapman)
If references are entirely missing, you can add them using this form.