Capital allocation to alternatives with a multivariate ladder gamma return distribution

John A. Buzacott ()
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John A. Buzacott: York University

Decisions in Economics and Finance, 2016, vol. 39, issue 2, No 5, 235-258

Abstract: Abstract This paper considers investment decision making when returns have a multivariate gamma distribution which has the particular correlation structure of Furman’s ladder gamma distribution. With an exponential utility function It is shown that there is a subset of the candidate investment opportunities to which investment should be allocated. This subset can be readily identified in a two step process that results in a list of candidate investments that is ranked in sequence of decreasing risk. The last investment opportunity on this list will be no risk cash. Investments are then selected from this list in sequence up to a cutoff point that depends on the investors capital and degree of risk aversion. If capital and degree of risk aversion are sufficiently large so that it is optimal to allocate some to no risk cash, then the capital allocated to each risky investment is a constant fraction of the total capital allocated to risky investments irrespective of how risk averse is the investor.

Keywords: Investment analysis; Portfolio selection; Ladder gamma distribution; Exponential utility (search for similar items in EconPapers)
JEL-codes: C44 G11 (search for similar items in EconPapers)
Date: 2016
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DOI: 10.1007/s10203-016-0175-3

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