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Pure higher-order effects in the portfolio choice model

Trino Ñíguez Grau (), Ivan Paya () and David Peel

Finance Research Letters, 2016, vol. 19, issue C, 255-260

Abstract: This paper examines the effects of higher-order risk attitudes and statistical moments on the optimal allocation of risky assets within the standard portfolio choice model. We derive the expressions for the optimal proportion of wealth invested in the risky asset to show they are functions of portfolio returns third- and fourth-order moments as well as on the investor’s risk preferences of prudence and temperance. We illustrate the relative importance that the introduction of those higher-order effects have in the decision of expected utility maximizers using data for the US.

Keywords: Higher-order moments; Portfolio choice; Prudence; Taylor approximation; Temperance (search for similar items in EconPapers)
JEL-codes: C14 G11 (search for similar items in EconPapers)
Date: 2016
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Handle: RePEc:eee:finlet:v:19:y:2016:i:c:p:255-260