Choice Under Uncertainty and Portfolio Optimization in a Static Framework: The Markowitz Model

Patrice Poncet () and Roland Portait
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Patrice Poncet: ESSEC Business School
Roland Portait: ESSEC Business School

Chapter 21 in Capital Market Finance, 2022, pp 873-928 from Springer

Abstract: Abstract Section 21.1 presents the theory of choice under uncertainty with a brief exposition of the expected utility criterion (Von Neuman and Morgenstern, VNM) and the Mean-Variance (MV) paradigm. Section 21.2 is devoted to an intuitive presentation of the main concepts of portfolio theory such as efficient frontier and diversification. Section 21.3 rigorously presents the mathematical analysis of the static portfolio selection strategies by an investor who respects the MV criterion (Markowitz model) under the assumption that short positions are allowed. Section 21.4 offers various extensions of the standard model: no short positions, preferences described by HARA utilities (whose compliance with the MV criterion is only a special case), loss aversion and other behaviors not always consistent with VNM rationality.

Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sptchp:978-3-030-84600-8_21

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DOI: 10.1007/978-3-030-84600-8_21

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