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Approximating exact expected utility via portfolio efficient frontiers

Alessandra Carleo (), Francesco Cesarone (), Andrea Gheno () and Jacopo Maria Ricci ()
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Alessandra Carleo: University of Roma Tre
Francesco Cesarone: University of Roma Tre
Andrea Gheno: University of Roma Tre
Jacopo Maria Ricci: University of Roma Tre

Decisions in Economics and Finance, 2017, vol. 40, issue 1, 115-143

Abstract: Abstract Expected utility theory is nowadays accepted as the standard for rational choice among risky assets. However, as Harry Markowitz recently pointed out, the problem of how the maximum expected utility along the risk–return portfolio efficient frontiers approximates the exact maximum expected utility is still open. This paper shows that some popular risk–return models are actually able to approximate expected utility maximization with respect to classical and new distance measures. It also analyzes the ability of the whole risk–return efficient frontiers to approximate the exact one. Our empirical analysis is based on recent publicly available real-world data sets.

Keywords: Portfolio optimization; Expected utility; Multiobjective optimization; Asset management (search for similar items in EconPapers)
JEL-codes: C61 D81 G11 (search for similar items in EconPapers)
Date: 2017
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