Portfolio Selection in Quantile Decision Models

Luciano De Castro, Antonio Galvao, Gabriel Montes Rojas and Jose Olmo
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Luciano De Castro: University of Iowa
Gabriel Montes Rojas: CONICET. Instituto Interdisciplinario de Economía Política, Universidad de Buenos Aires
Authors registered in the RePEc Author Service: Gabriel Montes-Rojas ()

No 11, Working Papers from Red Nacional de Investigadores en Economía (RedNIE)

Abstract: This paper develops an optimal portfolio allocation model for an investor with quantile preferences, i.e., who maximizes the t-quantile of the portfolio return. Quantile preferences allow to study heterogeneity in individuals’ portfolio choice and have a solid axiomatic foundation. We derive conditions under which the optimal portfolio allocation problem has an interior solution guaranteeing diversification and conditions under which the portfolio allocation is characterized by two regions: full diversification for quantiles below the median and no diversification for upper quantiles. These results are illustrated via simulation and empirically with a portfolio of cash, a stock index and a bond index.

Keywords: Optimal; Asset; Allocation; Quantile; Preferences; Portfolio; Theory; Risk; Attitude (search for similar items in EconPapers)
JEL-codes: G11 (search for similar items in EconPapers)
Pages: 64 pages
Date: 2020-06
New Economics Papers: this item is included in nep-ore
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Journal Article: Portfolio selection in quantile decision models (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:aoz:wpaper:11

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