Portfolio selection and portfolio frontier with background risk

Hung-Hsi Huang and Ching-Ping Wang

The North American Journal of Economics and Finance, 2013, vol. 26, issue C, 177-196

Abstract: This study analyzes individual portfolio selection in the presence of background risk. Under the expected utility framework, this study determines necessary and sufficient conditions of utility functions for two-fund monetary separation with independently additive and multiplicative background risks, respectively. Under a mean–variance framework, this study analyzes the portfolio frontier characteristic given dependently additive background risk. The main findings include the two-fund separation property, portfolio frontier shapes, and a portfolio variance comparison between situations with and without background risk and Zero-Beta CAPM. In particular, the portfolio frontier constructed from n risky assets plus one riskless asset is analogous with only n risky assets.

Keywords: Background risk; Portfolio selection; Portfolio frontier; Two-fund separation; Zero-Beta CAPM (search for similar items in EconPapers)
JEL-codes: G11 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:26:y:2013:i:c:p:177-196

DOI: 10.1016/j.najef.2013.09.001

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