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- Title
MEAN–VARIANCE VERSUS FULL-SCALE OPTIMIZATION: BROAD EVIDENCE FOR THE UK.
- Authors
HAGSTRÖMER, BJÖRN; ANDERSON, RICHARD G.; BINNER, JANE M.; ELGER, THOMAS; NILSSON, BIRGER
- Abstract
Portfolio choice by full-scale optimization applies the empirical return distribution to a parameterized utility function, and the maximum is found through numerical optimization. Using a portfolio choice setting of three UK equity indices we identify several utility functions featuring loss aversion and prospect theory, under which full-scale optimization is a substantially better approach than the mean–variance approach. As the equity indices have return distributions with small deviations from normality, the findings indicate much broader usefulness of full-scale optimization than has earlier been shown. The results hold in- and out-of-sample, and the performance improvements are given in terms of utility as well as certainty equivalents.
- Subjects
UNITED Kingdom; EQUITY (Law); UTILITY functions; INVESTMENTS; PROSPECTING costs; MATHEMATICAL optimization; NUMERICAL analysis; MATHEMATICAL analysis; THEORY of knowledge
- Publication
Manchester School (1463-6786), 2008, Vol 76, p134
- ISSN
1463-6786
- Publication type
Article
- DOI
10.1111/j.1467-9957.2008.01084.x