Mean-Variance vs. Full-Scale Optimization: Broad Evidence for the UK

Björn Hagströmer (), Richard Anderson (), Jane Binner (), Thomas Elger and Birger Nilsson
Additional contact information
Björn Hagströmer: School of Business, Stockholm University, Postal: School of Business , Stockholm University, SE-106 91 STOCKHOLM, Sweden
Jane Binner: Sheffield University

No 2008:1, Working Papers from Lund University, Department of Economics

Abstract: In the Full-Scale Optimization approach the complete empirical financial return probability distribution is considered; and the utility maximizing solution is found through numerical optimization. Using a portfolio choice setting of three UK equity indices we identify several utility functions featuring loss aversion and prospect theory; under which Full-Scale Optimization is a substantially better approach than the mean-variance approach. As the equity indices have return distributions with small deviations from normality; the findings indicate much broader usefulness of Full-Scale Optimization than has earlier been shown. The results hold in and out of sample; and the performance improvements are given in terms of utility as well as certainty equivalents.

Keywords: portfolio choice; utility maximization; full-scale optimization; S-shaped utility; bilinear utility (search for similar items in EconPapers)
JEL-codes: G11 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2007-10-24
New Economics Papers: this item is included in nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Published in The Manchester School, 2008, pages 134-156.

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