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Portfolio Selection with Monotone Mean-Variance Preferences

Fabio Maccheroni, Massimo Marinacci, Aldo Rustichini and Marco Taboga ()

No 664, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: We propose a portfolio selection model based on a class of monotone preferences that coincide with mean-variance preferences on their domain of monotonicity, but differ where mean-variance preferences fail to be monotone and are therefore not economically meaningful. The functional associated to this new class of preferences is the best approximation of the mean-variance functional among those which are monotonic. We solve the portfolio selection problem and we derive a monotone version of the CAPM, which has two main features: (i) it is, unlike the standard CAPM model, arbitrage free, (ii) it has empirically testable CAPM-like relations. The monotone CAPM has thus a sounder theoretical foundation than the standard CAPM and a comparable empirical tractability.

Keywords: Portfolio Selection; Decision Theory; Mean-Variance (search for similar items in EconPapers)
JEL-codes: C6 D8 G11 (search for similar items in EconPapers)
Date: 2008-04
New Economics Papers: this item is included in nep-ore
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Related works:
Journal Article: PORTFOLIO SELECTION WITH MONOTONE MEAN‐VARIANCE PREFERENCES (2009) Downloads
Working Paper: Portfolio Selection with Monotone Mean-Variance Preferences (2007) Downloads
Working Paper: Portfolio Selection with Monotone Mean-Variance Preferences (2005) Downloads
Working Paper: Portfolio Selection with Monotone Mean-Variance Preferences (2004) Downloads
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