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Portfolio Selection with minimum transaction lots: an approach with dual expected utility

  • Marisa Cenci

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  • Floriana Filippini
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    In this paper we analyse the portfolio selectionproblem with minimum transactionlots in the context of non-expected utility theory. We assume that the decisionmaker ranks the alternatives by using a specific DualExpectedUtility. This functionallows portfolio values less or equal a fixed benchmark tobe weighted inadifferent way from values greater than the fixedbenchmark. Under normallydistributedreturns and opportunechoice ofthe benchmark, the suggested approach leads to an NP-complete problemandhas the advantage ofusing mixed linear programming to obtainthe optimal portfolio. We also show resultsobtained by implementing the model on the Italian stock market. (keywords: dual expectedutility, portfolio selection, NP-completeness, linear programming with mixed variables)

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    Paper provided by Department of Economics - University Roma Tre in its series Departmental Working Papers of Economics - University 'Roma Tre' with number 0050.

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    Length: 23
    Date of creation: Dec 2005
    Date of revision:
    Handle: RePEc:rtr:wpaper:0050
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    1. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
    2. Tversky, Amos & Kahneman, Daniel, 1992. " Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
    3. Tversky, Amos & Kahneman, Daniel, 1991. "Loss Aversion in Riskless Choice: A Reference-Dependent Model," The Quarterly Journal of Economics, MIT Press, vol. 106(4), pages 1039-61, November.
    4. Floriana Filippini & Marisa Cenci, 2005. "Portfolio selection: a linear approach with dual expected utility," Departmental Working Papers of Economics - University 'Roma Tre' 0048, Department of Economics - University Roma Tre.
    5. Benati, Stefano, 2003. "The optimal portfolio problem with coherent risk measure constraints," European Journal of Operational Research, Elsevier, vol. 150(3), pages 572-584, November.
    6. Hadar, Josef & Seo, Tae Kun, 1995. "Asset diversification in Yaari's dual theory," European Economic Review, Elsevier, vol. 39(6), pages 1171-1180, June.
    7. Mansini, Renata & Speranza, Maria Grazia, 1999. "Heuristic algorithms for the portfolio selection problem with minimum transaction lots," European Journal of Operational Research, Elsevier, vol. 114(2), pages 219-233, April.
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