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A Simple Model of Robust Portfolio Selection

Author

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  • Taboga, Marco

Abstract

We propose a single-period portfolio selection model which allows the decision maker to easily deal with uncertainty about the distribution of asset returns. The model is preference-based and relies upon a separate parametrization of risk aversion and ambiguity aversion. A particular specification of preferences allows us to solve the portfolio selection problem and obtain a simple closed-form expression for the portfolio weights, which lends itself to a straightforward economic interpretation.

Suggested Citation

  • Taboga, Marco, 2004. "A Simple Model of Robust Portfolio Selection," MPRA Paper 16472, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:16472
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    File URL: https://mpra.ub.uni-muenchen.de/16472/1/MPRA_paper_16472.pdf
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    References listed on IDEAS

    as
    1. Frankfurter, George M. & Phillips, Herbert E. & Seagle, John P., 1971. "Portfolio Selection: The Effects of Uncertain Means, Variances, and Covariances," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 6(05), pages 1251-1262, December.
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    3. Klein, Roger W. & Bawa, Vijay S., 1976. "The effect of estimation risk on optimal portfolio choice," Journal of Financial Economics, Elsevier, vol. 3(3), pages 215-231, June.
    4. Ravi Jagannathan & Tongshu Ma, 2003. "Risk Reduction in Large Portfolios: Why Imposing the Wrong Constraints Helps," Journal of Finance, American Finance Association, vol. 58(4), pages 1651-1684, August.
    5. Barry, Christopher B, 1974. "Portfolio Analysis under Uncertain Means, Variances, and Covariances," Journal of Finance, American Finance Association, vol. 29(2), pages 515-522, May.
    6. Raman Uppal & Tan Wang, 2003. "Model Misspecification and Underdiversification," Journal of Finance, American Finance Association, vol. 58(6), pages 2465-2486, December.
    7. Rustem, Berc & Becker, Robin G. & Marty, Wolfgang, 2000. "Robust min-max portfolio strategies for rival forecast and risk scenarios," Journal of Economic Dynamics and Control, Elsevier, vol. 24(11-12), pages 1591-1621, October.
    8. Krasker, William S, 1982. " Minimax Behavior in Portfolio Selection," Journal of Finance, American Finance Association, vol. 37(2), pages 609-614, May.
    9. Peter Klibanoff & Massimo Marinacci & Sujoy Mukerji, 2005. "A Smooth Model of Decision Making under Ambiguity," Econometrica, Econometric Society, vol. 73(6), pages 1849-1892, November.
    10. Dow, James & Werlang, Sergio Ribeiro da Costa, 1992. "Uncertainty Aversion, Risk Aversion, and the Optimal Choice of Portfolio," Econometrica, Econometric Society, vol. 60(1), pages 197-204, January.
    11. Green, Richard C & Hollifield, Burton, 1992. " When Will Mean-Variance Efficient Portfolios Be Well Diversified?," Journal of Finance, American Finance Association, vol. 47(5), pages 1785-1809, December.
    12. Pascal J. Maenhout, 2004. "Robust Portfolio Rules and Asset Pricing," Review of Financial Studies, Society for Financial Studies, vol. 17(4), pages 951-983.
    13. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-1445, November.
    14. Epstein, Larry G & Wang, Tan, 1994. "Intertemporal Asset Pricing Under Knightian Uncertainty," Econometrica, Econometric Society, vol. 62(2), pages 283-322, March.
    15. Nicholas Barberis, 2000. "Investing for the Long Run when Returns Are Predictable," Journal of Finance, American Finance Association, vol. 55(1), pages 225-264, February.
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    More about this item

    Keywords

    Portfolio selection; robustness; ambiguity.;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics

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