Optimal guaranteed return portfolios and the casino effect

Cees Dert and Bart Oldenkamp
Additional contact information
Cees Dert: Vrije Universiteit Amsterdam, Faculteit der Economische Wetenschappen en Econometrie (Free University Amsterdam, Faculty of Economics Sciences, Business Administration and Economitrics

No 25, Serie Research Memoranda from VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics

Abstract: In this paper, we address the problem of maximizing expected return subject to a worst case return constraint by composing a portfolio that may consist of cash, holdings in a stock market index and options on the index. We derive properties of optimal and feasible portfolios and present a linear programming model to solve the problem. The optimal portfolios have pay-off functions that reflect a gambling policy. We show that optimal solutions to a large class of portfolio models that maximize expected return subject to downside risk constraints are driven by this casino effect and present tractable conditions under which it occurs in our model. We propose to control the casino effect by using chance constraints. Using results from financial theory we formulate an LP model that maximizes expected return subject to worst case return constraints and chance constraints on achieving prespecified levels of return. The results are illustrated with real life data on the S&P 500 index.

JEL-codes: G23 (search for similar items in EconPapers)
Date: 1997
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://degree.ubvu.vu.nl/repec/vua/wpaper/pdf/19970025.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:vua:wpaper:1997-25

Access Statistics for this paper

More papers in Serie Research Memoranda from VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics Contact information at EDIRC.
Bibliographic data for series maintained by R. Dam ().