Mean-Variance Approximations to Expected Logarithmic Utility

Lawrence B. Pulley
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Lawrence B. Pulley: Brandeis University, Waltham, Massachusetts

Operations Research, 1983, vol. 31, issue 4, 685-696

Abstract: In this paper, we investigate how closely functions of means and variances can approximate Von Neumann-Morgenstern expected utility modeled as a logarithmic utility-of-wealth function. Using historical security return data, we computed portfolios maximizing expected logarithmic utility and compared them to those maximizing appropriate mean-variance formulations. In all cases the approximations were very good, and in many cases the optimal portfolios were virtually identical. We conclude that the mean-variance model can serve as a useful surrogate to at least one popular alternative investment strategy.

Keywords: 93 M-V approximations to expected logarithmic utility; 198 M-V approximations to expected logarithmic utility (search for similar items in EconPapers)
Date: 1983
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Persistent link: https://EconPapers.repec.org/RePEc:inm:oropre:v:31:y:1983:i:4:p:685-696

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