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Does Portfolio Optimization Pay?

  • Günter Franke

    ()

    (Department of Economics, University of Konstanz, Germany)

  • Ferdinand Graf

    ()

    (Department of Economics, University of Konstanz, Germany)

All HARA-utility investors with the same exponent invest in a single risky fund and the risk-free asset. In a continuous time-model stock proportions are proportional to the inverse local relative risk aversion of the investor (1/γ-rule). This paper analyses the conditions under which the optimal buy and holdportfolio of a HARA-investor can be approximated by the optimal portfolio of an investor with some low level of constant relative risk aversion using the 1/γ-rule. It turns out that the approximation works very well in markets without approximate arbitrage opportunities. In markets with high equity premiums this approximation may be of low quality.

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File URL: http://www.wiwi.uni-konstanz.de/workingpaperseries/WP_19-11-Franke-Graf.pdf
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Paper provided by Department of Economics, University of Konstanz in its series Working Paper Series of the Department of Economics, University of Konstanz with number 2011-19.

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Length: 34 pages
Date of creation: 31 May 2011
Date of revision:
Handle: RePEc:knz:dpteco:1119
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  1. Ait-Sahalia, Yacine & Lo, Andrew W., 2000. "Nonparametric risk management and implied risk aversion," Journal of Econometrics, Elsevier, vol. 94(1-2), pages 9-51.
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