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On the Effect of Premia and Penalties on the Optimal Portfolio Choice

Author

Listed:
  • Currarini, Sergio
  • Marini, Marco A.

Abstract

In a standard portfolio choice between a risky and a safe asset, we study the effect of imposing premia and penalties conditional on the realized return of the portfolio meeting a given threshold. We show that thresholds set at ”intermediate levels” have the effect to increase the optimal share of the safe asset, while very low and very high thresholds may induce larger shares of the risky investment if a condition on the curvature of the utility function holds.

Suggested Citation

  • Currarini, Sergio & Marini, Marco A., 2012. "On the Effect of Premia and Penalties on the Optimal Portfolio Choice," MPRA Paper 70726, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:70726
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    File URL: https://mpra.ub.uni-muenchen.de/70726/1/MPRA_paper_70726.pdf
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    More about this item

    Keywords

    Portfolio; Premium; Risk Aversion;
    All these keywords.

    JEL classification:

    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
    • D0 - Microeconomics - - General
    • G0 - Financial Economics - - General
    • M0 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - General
    • M00 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - General - - - General

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