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Mean-Variance vs. Full-Scale Optimization: Broad Evidence for the UK

Författare:
Publiceringsår: 2008
Språk: Engelska
Publikation/Tidskrift/Serie: Working Papers, Department of Economics, Lund University
Nummer: 1
Dokumenttyp: Working paper
Förlag: Department of Economics, Lund University

Sammanfattning

In the Full-Scale Optimization approach the complete empirical financial return probability distribution is considered; and the utility maximizing solution 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.

Disputation

Nyckelord

  • Business and Economics
  • portfolio choice
  • utility maximization
  • full-scale

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