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Maximally Acceptable Portfolios

In: Inspired by Finance

Author

Listed:
  • Ernst Eberlein

    (University of Freiburg, Department of Mathematical Stochastics)

  • Dilip B. Madan

    (University of Maryland, Robert H. Smith School of Business)

Abstract

Portfolios are selected in non-Gaussian contexts to maximize a Cherny and Madan index of acceptability. Analytical gradients are developed for the purpose of optimizing portfolio searches on the unit sphere. It is shown that though an acceptability index is not a preference ordering, many utilities will concur with acceptability maximization. A stylized economy illustrates the advantages from the perspective of acceptability of nonlinear securities and options. In sample results for the year 2008 indicate that maximizing the acceptability index can lead to portfolios that second order stochastically dominate their Gaussian counterparts. Backtests over the period 1997 to 2008 reflect gains to maximizing acceptability over holding a maximal Sharpe ratio portfolio.

Suggested Citation

  • Ernst Eberlein & Dilip B. Madan, 2014. "Maximally Acceptable Portfolios," Springer Books, in: Yuri Kabanov & Marek Rutkowski & Thaleia Zariphopoulou (ed.), Inspired by Finance, edition 127, pages 257-272, Springer.
    • Handle: RePEc:spr:sprchp:978-3-319-02069-3_11
    DOI: 10.1007/978-3-319-02069-3_11
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