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Comparisons and Characterizations of the Mean-Variance, Mean-VaR, Mean-CVaR Models for Portfolio Selection With Background Risk

Author

Listed:
  • Xu, Guo
  • Wing-Keung, Wong
  • Lixing, Zhu

Abstract

This paper investigates the impact of background risk on an investor’s portfolio choice in a mean-VaR, mean-CVaR and mean-variance framework, and analyzes the characterizations of the mean-variance boundary and mean-VaR efficient frontier in the presence of background risk. We also consider the case with a risk-free security.

Suggested Citation

  • Xu, Guo & Wing-Keung, Wong & Lixing, Zhu, 2013. "Comparisons and Characterizations of the Mean-Variance, Mean-VaR, Mean-CVaR Models for Portfolio Selection With Background Risk," MPRA Paper 51827, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:51827
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    File URL: https://mpra.ub.uni-muenchen.de/51827/1/MPRA_paper_51827.pdf
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    References listed on IDEAS

    as
    1. Fatma Lajeri-Chaherli, 2002. "More on Properness: The Case of Mean-Variance Preferences," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 27(1), pages 49-60, June.
    2. Cardak, Buly A. & Wilkins, Roger, 2009. "The determinants of household risky asset holdings: Australian evidence on background risk and other factors," Journal of Banking & Finance, Elsevier, vol. 33(5), pages 850-860, May.
    3. Shum, Pauline & Faig, Miquel, 2006. "What explains household stock holdings?," Journal of Banking & Finance, Elsevier, vol. 30(9), pages 2579-2597, September.
    4. Joao F. Cocco, 2005. "Portfolio Choice in the Presence of Housing," Review of Financial Studies, Society for Financial Studies, vol. 18(2), pages 535-567.
    5. Merton, Robert C., 1971. "Optimum consumption and portfolio rules in a continuous-time model," Journal of Economic Theory, Elsevier, vol. 3(4), pages 373-413, December.
    6. Rosen, H.S.Harvey S. & Wu, Stephen, 2004. "Portfolio choice and health status," Journal of Financial Economics, Elsevier, vol. 72(3), pages 457-484, June.
    7. Das, Sanjiv & Markowitz, Harry & Scheid, Jonathan & Statman, Meir, 2010. "Portfolio Optimization with Mental Accounts," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 45(02), pages 311-334, April.
    8. Pelizzon, Loriana & Weber, Guglielmo, 2009. "Efficient portfolios when housing needs change over the life cycle," Journal of Banking & Finance, Elsevier, vol. 33(11), pages 2110-2121, November.
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    10. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, March.
    11. Thomas Eichner & Andreas Wagener, 2003. "Variance Vulnerability, Background Risks, and Mean-Variance Preferences," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 28(2), pages 173-184, December.
    12. Paul A. Samuelson, 2011. "Lifetime Portfolio Selection by Dynamic Stochastic Programming," World Scientific Book Chapters,in: THE KELLY CAPITAL GROWTH INVESTMENT CRITERION THEORY and PRACTICE, chapter 31, pages 465-472 World Scientific Publishing Co. Pte. Ltd..
    13. Berkowitz, Michael K. & Qiu, Jiaping, 2006. "A further look at household portfolio choice and health status," Journal of Banking & Finance, Elsevier, vol. 30(4), pages 1201-1217, April.
    14. Edwards, Ryan D, 2008. "Health Risk and Portfolio Choice," Journal of Business & Economic Statistics, American Statistical Association, vol. 26, pages 472-485.
    15. Merton, Robert C, 1969. "Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 247-257, August.
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    17. Heaton, John & Lucas, Deborah, 2000. "Portfolio Choice in the Presence of Background Risk," Economic Journal, Royal Economic Society, vol. 110(460), pages 1-26, January.
    18. Baptista, Alexandre M., 2008. "Optimal delegated portfolio management with background risk," Journal of Banking & Finance, Elsevier, vol. 32(6), pages 977-985, June.
    19. Guo, Xu & Wong, Wing-Keung & Zhu, Lixing, 2013. "An analysis of portfolio selection with multiplicative background risk," MPRA Paper 51331, University Library of Munich, Germany.
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    More about this item

    Keywords

    Background risk; Portfolio selection; VaR; CVaR;

    JEL classification:

    • C00 - Mathematical and Quantitative Methods - - General - - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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