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Robust Portfolio Choices and Asset Holdings

Giannis Vardas () and Anastasios Xepapadeas ()

Ekonomia, 2005, vol. 8, issue 1, 1-20

Abstract: Optimal portfolio rules are derived under uncertainty aversion by formulating the portfolio choice problem as a robust control problem. Using a constant relative risk aversion (CRRA) utility function, we present the solution of the robust portfolio choice problem in the cases of one and two risky assets. For the two risky assets and one risk-free asset case, we show that under uncertainty aversion and when volatility of the one asset is substantially high than that of the other, the total holdings of risky assets as a proportion of the investor's wealth could increase as compared to the holdings under the Merton rule, which is the standard risk aversion case. This result indicates a more aggressive behaviour under risk aversion and robust control policies, which goes against the general beliefs, but which agrees with more recent findings.

JEL-codes: G11 D81 (search for similar items in EconPapers)
Date: 2005
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