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Portfolio Decisions with Higher Order Moments

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  • P. M. Kleniati
  • Berc Rustem

Abstract

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.

Suggested Citation

  • P. M. Kleniati & Berc Rustem, 2009. "Portfolio Decisions with Higher Order Moments," Working Papers 021, COMISEF.
    • Handle: RePEc:com:wpaper:021
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    References listed on IDEAS

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    1. Kon, Stanley J, 1984. "Models of Stock Returns-A Comparison," Journal of Finance, American Finance Association, vol. 39(1), pages 147-165, March.
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    Cited by:

    1. Andries Steenkamp, 2023. "Convex scalarizations of the mean-variance-skewness-kurtosis problem in portfolio selection," Papers 2302.10573, arXiv.org.

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