Boundaries of the risk aversion coefficient: Should we invest in the global minimum variance portfolio?

Boundaries of the risk aversion coefficient: Should we invest in the global minimum variance portfolio?

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Article ID: iaor2013915
Volume: 219
Issue: 10
Start Page Number: 5440
End Page Number: 5448
Publication Date: Jan 2013
Journal: Applied Mathematics and Computation
Authors: ,
Keywords: risk, optimization
Abstract:

Due to estimation risk, the portfolios on the efficient frontier can be statistically indistinguishable from the global minimum variance portfolio. We provide a methodology for determining a bound on the risk aversion coefficient, which separates portfolios that are equivalent or significantly different from the global minimum variance (GMV) portfolio. We conclude that investing in the GMV portfolio is statistically justified for investors with a very wide range of the risk aversion coefficients.

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