MEAN-VARIANCE VERSUS FULL-SCALE OPTIMIZATION: BROAD EVIDENCE FOR THE UK

Björn Hagströmer, Richard G. Anderson, Jane M. Binner, Thomas Elger () and Birger Nilsson

Manchester School, 2008, vol. 76, issue s1, pages 134-156

Abstract: 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. Copyright © 2008 The Authors. Journal compilation © 2008 Blackwell Publishing Ltd and The University of Manchester.

Date: 2008

Downloads: (external link)
http://www.blackwell-synergy.com/doi/abs/10.1111/j.1467-9957.2008.01084.x link to full text (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:bla:manchs:v:76:y:2008:i:s1:p:134-156

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=1463-6786

Access Statistics for this article

Manchester School is edited by Keith Blackburn

More articles in Manchester School from University of Manchester
Series data maintained by Christopher F. Baum ().