Does Portfolio Optimization Pay?

Günter Franke () and Ferdinand Graf ()
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Ferdinand Graf: Department of Economics, University of Konstanz, Germany

No 2011-19, Working Paper Series of the Department of Economics, University of Konstanz from Department of Economics, University of Konstanz

Abstract: All HARA-utility investors with the same exponent invest in a single risky fund and the risk-free asset. In a continuous time-model stock proportions are proportional to the inverse local relative risk aversion of the investor (1/γ-rule). This paper analyses the conditions under which the optimal buy and holdportfolio of a HARA-investor can be approximated by the optimal portfolio of an investor with some low level of constant relative risk aversion using the 1/γ-rule. It turns out that the approximation works very well in markets without approximate arbitrage opportunities. In markets with high equity premiums this approximation may be of low quality.

Keywords: HARA-utility; portfolio choice; certainty equivalent; approximated choice (search for similar items in EconPapers)
JEL-codes: D81 G10 G11 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2011-05-31
New Economics Papers: this item is included in nep-upt
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