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Portfolio Selection in Quantile Decision Models

Author

Listed:
  • Luciano De Castro

    (University of Iowa)

  • Antonio F. Galvao

    (University of Arizona)

  • Gabriel Montes Rojas

    (CONICET. Instituto Interdisciplinario de Economía Política, Universidad de Buenos Aires)

  • José Olmo

    (Universidad de Zaragoza. University of Southampton. University Rd., Southampton)

Abstract

This paper develops an optimal portfolio allocation model for an investor with quantile preferences, i.e., who maximizes the t-quantile of the portfolio return. Quantile preferences allow to study heterogeneity in individuals’ portfolio choice and have a solid axiomatic foundation. We derive conditions under which the optimal portfolio allocation problem has an interior solution guaranteeing diversification and conditions under which the portfolio allocation is characterized by two regions: full diversification for quantiles below the median and no diversification for upper quantiles. These results are illustrated via simulation and empirically with a portfolio of cash, a stock index and a bond index.

Suggested Citation

  • Luciano De Castro & Antonio F. Galvao & Gabriel Montes Rojas & José Olmo, 2020. "Portfolio Selection in Quantile Decision Models," Working Papers 11, Red Nacional de Investigadores en Economía (RedNIE).
    • Handle: RePEc:aoz:wpaper:11
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    References listed on IDEAS

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    More about this item

    Keywords

    Optimal Asset Allocation Quantile Preferences Portfolio Theory Risk Attitude;

    JEL classification:

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

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