Portfolio selection problems consistent with given preference orderings
TL;DR: In this paper, the authors theoretically and empirically investigated the connection between portfolio theory and ordering theory, and examined three different portfolio problems and the respective orderings used to rank investors' choices: (1) risk orderings, (2) variability orderings and (3) tracking-error orderings.
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Abstract: This paper theoretically and empirically investigates the connection between portfolio theory and ordering theory. In particular, we examine three different portfolio problems and the respective orderings used to rank investors' choices: (1) risk orderings, (2) variability orderings, and (3) tracking-error orderings. For each problem, we discuss the properties of the risk measures, variability measures, and tracking-error measures, as well as their consistency with investor choices. Finally, for each problem, we propose an empirical application of several admissible portfolio optimization problems using the US stock market. The proposed empirical analysis permits us to evaluate the ex-post impact of the optimal choices, thereby deriving completely different investors' preference orderings during the recent financial crisis.
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References
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Amos Tversky,Daniel Kahneman +1 more
TL;DR: Cumulative prospect theory as discussed by the authors applies to uncertain as well as to risky prospects with any number of outcomes, and it allows different weighting functions for gains and for losses, and two principles, diminishing sensitivity and loss aversion, are invoked to explain the characteristic curvature of the value function and the weighting function.
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Coherent Measures of Risk
TL;DR: In this paper, the authors present and justify a set of four desirable properties for measures of risk, and call the measures satisfying these properties "coherent", and demonstrate the universality of scenario-based methods for providing coherent measures.
Conditional value-at-risk for general loss distributions
TL;DR: Fundamental properties of conditional value-at-risk are derived for loss distributions in finance that can involve discreetness and provides optimization shortcuts which, through linear programming techniques, make practical many large-scale calculations that could otherwise be out of reach.
Optimal Versus Naive Diversification: How Inefficient is the 1/N Portfolio Strategy?
TL;DR: In this article, the authors evaluate the out-of-sample performance of the sample-based mean-variance model, and its extensions designed to reduce estimation error, relative to the naive 1-N portfolio.
The Utility Analysis of Choices Involving Risk
TL;DR: In this paper, the authors suggest that an important class of reactions of individuals to risk can be rationalized by a rather simple extension of orthodox utility analysis, i.e., individuals frequently must, or can, choose among alternatives that differ, among other things, in the degree of risk to which the individual will be subject.
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