Utility Theory, Capital Asset Allocation, and Markowitz Portfolio Selection Model

Cheng Few Lee

Chapter 89 in Handbook of Investment Analysis, Portfolio Management, and Financial Derivatives:In 4 Volumes, 2024, pp 2901-2943 from World Scientific Publishing Co. Pte. Ltd.

Abstract: In this chapter, we first discuss utility theory and utility function in detail, then we show how asset allocation can be done in terms of quadratic utility function. Based upon these concepts, we show that Markowitz’s portfolio selection model can be executed by the constrained maximization approach. Real-world examples in terms of three securities are also demonstrated. In the Markowitz selection model, we consider that short sale is both allowed and not allowed.

Keywords: Financial Accounting; Financial Auditing; Mutual Funds; Hedge Funds; Asset Pricing; Options; Portfolio Analysis; Risk Management; Investment Analysis; Momentum Analysis; Behavior Analysis; Futures; Index Futures; CDCs; Financial Econometrics; Statistics; Financial Derivatives; Financial Accounting (search for similar items in EconPapers)
JEL-codes: G1 G11 G12 G3 M41 M42 (search for similar items in EconPapers)
Date: 2024
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