Standardized versus customized portfolio: A compensating variation approach

Standardized versus customized portfolio: A compensating variation approach

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Article ID: iaor200937794
Country: Germany
Volume: 165
Issue: 1
Start Page Number: 161
End Page Number: 185
Publication Date: Jan 2009
Journal: Annals of Operations Research
Authors: ,
Keywords: risk
Abstract:

We consider the investor choice among standardized portfolios, which are based on cash, bond and stock indexes. We present the intertemporal optimization problem with commonly used utility functions. We provide a method to determine the optimal investor's choice, based on the knowledge of investor's type (risk aversion and time horizon) and on market performances. For the utility functions envisaged, we compute the losses from not having access to a customized portfolio and show these losses may be severe.

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