Portfolio optimization with optimal expected utility risk measures

  • The purpose of this article is to evaluate optimal expected utility risk measures (OEU) in a risk-constrained portfolio optimization context where the expected portfolio return is maximized. We compare the portfolio optimization with OEU constraint to a portfolio selection model using value at risk as constraint. The former is a coherent risk measure for utility functions with constant relative risk aversion and allows individual specifications to the investor’s risk attitude and time preference. In a case study with three indices, we investigate how these theoretical differences influence the performance of the portfolio selection strategies. A copula approach with univariate ARMA-GARCH models is used in a rolling forecast to simulate monthly future returns and calculate the derived measures for the optimization. The results of this study illustrate that both optimization strategies perform considerably better than an equally weighted portfolio and a buy and hold portfolio. Moreover, our results illustrate that portfolio optimization with OEU constraint experiences individualized effects, e.g., less risk-averse investors lose more portfolio value in the financial crises but outperform their more risk-averse counterparts in bull markets.

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Author:Sebastian Geissel, Holger Graf, Julia Herbinger, Frank T. Seifried
URN:urn:nbn:de:hbz:tr5-1071
DOI:https://doi.org/10.1007/s10479-021-04403-7
Parent Title (English):Annals of Operations Research
Publisher:Springer Nature
Document Type:Article (specialist journals)
Language:English
Date of OPUS upload:2022/09/03
Year of first Publication:2022
Publishing University:Hochschule Trier
Release Date:2022/09/05
Tag:optimal expected utility; portfolio optimization; risk measures; value at risk
GND Keyword:Portfoliomanagement; Value at Risk; Erwarteter Nutzen
Volume:309
Issue:1
Page Number:19
First Page:59
Last Page:77
Departments:FB Wirtschaft
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft
Licence (German):License LogoCreative Commons - CC BY - Namensnennung 4.0 International