Optimal Portfolio Allocation under Higher Moments

Eric Jondeau and Michael Rockinger ()

European Financial Management, 2006, vol. 12, issue 1, 29-55

Abstract: We evaluate how departure from normality may affect the allocation of assets. A Taylor series expansion of the expected utility allows to focus on certain moments and to compute the optimal portfolio allocation numerically. A decisive advantage of this approach is that it remains operational even for a large number of assets. While the mean‐variance criterion provides a good approximation of the expected utility maximisation under moderate non‐normality, it may be ineffective under large departure from normality. In such cases, the three‐moment or four‐moment optimisation strategies may provide a good approximation of the expected utility.

Date: 2006
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https://doi.org/10.1111/j.1354-7798.2006.00309.x

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Working Paper: Optimal Portfolio Allocation Under Higher Moments (2004)
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