Behavior patterns of investment strategies under Roy's safety-first principle

Zhongfei Li, Jing Yao and Duan Li

The Quarterly Review of Economics and Finance, 2010, vol. 50, issue 2, 167-179

Abstract: The safety-first principle is a natural motivational factor in decision making, and is closely related to certain popular heuristics such as satisficing. We provide a systematic analysis of optimal portfolio choice under Roy's safety-first principle by examining and comparing the behavior patterns of three popular investment strategies: the optimal constant-rebalanced portfolio, dynamic-rebalanced portfolio and buy-and-hold strategies. Our results indicate the importance of a match between the investment strategy, the investment goal, and the investment horizon. We also develop a geometric approach to investigate the relationships among the safety-first, expected utility, and mean-variance models and offer an explanation for the long-standing debate concerning different patterns of time-diversification effects.

Keywords: Continuous-time; portfolio; selection; Safety-first; principle; Investment; strategies; Horizon; effects; Efficient; frontier (search for similar items in EconPapers)
Date: 2010
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Persistent link: https://EconPapers.repec.org/RePEc:eee:quaeco:v:50:y:2010:i:2:p:167-179

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