Portfolio Selection with Two-Stage Preferences
We propose a model of portfolio selection under ambiguity, based on a two-stage valuation procedure which disentangles ambiguity and ambiguity aversion. The model does not imply 'extreme pessimism' from the part of the investor, as multiple priors models do. Furthermore, its analytical tractability allows to study complex problems thus far not analyzed, such as joint uncertainty about means and variances of returns.
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