Utility Theory, Capital Asset Allocation, and Markowitz Portfolio-Selection Model

Cheng Few Lee

Chapter 80 in Handbook of Financial Econometrics, Mathematics, Statistics, and Machine Learning:(In 4 Volumes), 2020, pp 2713-2756 from World Scientific Publishing Co. Pte. Ltd.

Abstract: In this chapter, we first discuss utility theory and utility function in detail, then we show how asset allocation can be done in terms of the quadratic utility function. Based upon these concepts, we show Markowitz’s portfolio selection model can be executed by constrained maximization approach. Real world examples in terms of three securities are also demonstrated. In the Markowitz selection model, we consider that short sale is both allowed and not allowed.

Keywords: Financial Econometrics; Financial Mathematics; Financial Statistics; Financial Technology; Machine Learning; Covariance Regression; Cluster Effect; Option Bound; Dynamic Capital Budgeting; Big Data (search for similar items in EconPapers)
JEL-codes: C01 C1 G32 (search for similar items in EconPapers)
Date: 2020
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