 Mean-variance versus utility maximization revisited: The case of constant relative risk aversionKonstantinos Kassimatis International Review of Financial Analysis, 2021, vol. 78, issue C Abstract: We examine if mean-variance (M-V) is a good proxy for portfolios based on the Constant Relative Risk Aversion (CRRA) utility function. M-V portfolios are considered good proxies for portfolios from several utility functions which is why they are routinely used in the portfolio theory literature as the benchmark. Our results clearly show this is not the case. Low risk CRRA portfolios are in many cases very different to M-V portfolios, especially with respect to downside risk. If a risk-free asset is available, in many cases, no M-V portfolio is an adequate proxy for CRRA portfolios. The implications of our findings are that: i) M-V portfolios are a poor proxy for investors with CRRA preferences, ii) CRRA portfolios are more suited to investors who care about downside risk than M-V portfolios, and iii) the efficacy of M-V to proxy for utility maximization should be examined more thoroughly. Keywords: Utility maximization; Constant relative risk aversion; Mean-variance (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:78:y:2021:i:c:s1057521921002556 DOI: 10.1016/j.irfa.2021.101932 Access Statistics for this article International Review of Financial Analysis is currently edited by B.M. Lucey More articles in International Review of Financial Analysis from Elsevier |
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