The 1/N investment strategy is optimal under high model ambiguity

Georg Ch. Pflug, Alois Pichler and David Wozabal

Journal of Banking & Finance, 2012, vol. 36, issue 2, 410-417

Abstract: The 1/N investment strategy, i.e. the strategy to split one’s wealth uniformly between the available investment possibilities, recently received plenty of attention in the literature. In this paper, we demonstrate that the uniform investment strategy is rational in situations where an agent is faced with a sufficiently high degree of model uncertainty in the form of ambiguous loss distributions. More specifically, we use a classical risk minimization framework to show that, for a broad class of risk measures, as the uncertainty concerning the probabilistic model increases, the optimal decisions tend to the uniform investment strategy.

Keywords: Model uncertainty; Risk aware planning; Robust optimization (search for similar items in EconPapers)
JEL-codes: C44 D14 D81 G11 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (83)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:36:y:2012:i:2:p:410-417

DOI: 10.1016/j.jbankfin.2011.07.018

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