Portfolio Selection with Monotone Mean-Variance Preferences

Fabio Maccheroni (), Massimo Marinacci, Aldo Rustichini () and Marco Taboga ()
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Fabio Maccheroni: Istituto di Metodi Quantitativi and IGIER, Università Bocconi
Aldo Rustichini: Department of Economics, University of Minnesota

No 664, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research Department

Abstract: We propose a portfolio selection model based on a class of monotone preferences that coincide with mean-variance preferences on their domain of monotonicity, but differ where mean-variance preferences fail to be monotone and are therefore not economically meaningful. The functional associated to this new class of preferences is the best approximation of the mean-variance functional among those which are monotonic. We solve the portfolio selection problem and we derive a monotone version of the CAPM, which has two main features: (i) it is, unlike the standard CAPM model, arbitrage free, (ii) it has empirically testable CAPM-like relations. The monotone CAPM has thus a sounder theoretical foundation than the standard CAPM and a comparable empirical tractability.

Keywords: Portfolio Selection; Decision Theory; Mean-Variance (search for similar items in EconPapers)
JEL-codes: C6 D8 G11 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ore
Date: 2008-04
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Related works:
Working Paper: Portfolio Selection with Monotone Mean-Variance Preferences (2005)
Working Paper: Portfolio Selection with Monotone Mean-Variance Preferences (2007)
Working Paper: Portfolio Selection with Monotone Mean-Variance Preferences (2004)
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