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Portfolio Decisions with Higher Order Moments

Listed author(s):
  • P. M. Kleniati
  • Berc Rustem
Registered author(s):

    In this paper, we address the global optimization of two interesting nonconvex problems in finance. We relax the normality assumption underlying the classical Markowitz mean-variance portfolio optimization model and consider the incorporation of skewness (third moment) and kurtosis (fourth moment). The investor seeks to maximize the expected return and the skewness of the portfolio and minimize its variance and kurtosis, subject to budget and no short selling constraints. In the first model, it is assumed that asset statistics are exact. The second model allows for uncertainty in asset statistics. We consider rival discrete estimates for the mean, variance, skewness and kurtosis of asset returns. A robust optimization framework is adopted to compute the best investment portfolio maximizing return, skewness and minimizing variance, kurtosis, in view of the worst-case asset statistics. In both models, the resulting optimization problems are nonconvex. We introduce a computational procedure for their global optimization.

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    Paper provided by COMISEF in its series Working Papers with number 021.

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    Length: 28 pages
    Date of creation: 10 Nov 2009
    Handle: RePEc:com:wpaper:021
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