Mean-Variance vs. Full-Scale Optimization: Broad Evidence for the UK
2008 (English)In: Manchester School, ISSN 1463-6786, E-ISSN 1467-9957, Vol. 76, 134-156 p.Article in journal (Refereed) Published
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.
Place, publisher, year, edition, pages
2008. Vol. 76, 134-156 p.
Research subject Business Administration
IdentifiersURN: urn:nbn:se:su:diva-43257OAI: oai:DiVA.org:su-43257DiVA: diva2:355089