Published in:FRB of St. Louis Working Paper ; No. 2007-016D
Extent:
1 Online-Ressource (32 p)
Language:
Not determined
DOI:
10.2139/ssrn.979811
Identifier:
Origination:
Footnote:
Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments May 2008 erstellt
Description:
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