TY - JOUR
T1 - Downside Loss Aversion and Portfolio Growth
AU - Kale, Jivendra
AU - Sheth, Arnav
PY - 2015/6/1
Y1 - 2015/6/1
N2 - Optimizing over power-log utility functions allow for the inclusion of downside loss aversion, a broader range of investor preferences, and account for higher-order moments like skewness and kurtosis in the optimization process. We implement multi-period power-log optimization (PLO) with annual rebalancing on a portfolio consisting of a treasury security, the S&P500 index and a call option on the index. PLO results in higher geometric average realized returns with lower tail risk, and lower standard deviation than meanvariance efficient portfolios with the same ex-ante expected returns. It also provides better downside protection against large, negative return surprises, such as the down markets in 2002 and 2008.
AB - Optimizing over power-log utility functions allow for the inclusion of downside loss aversion, a broader range of investor preferences, and account for higher-order moments like skewness and kurtosis in the optimization process. We implement multi-period power-log optimization (PLO) with annual rebalancing on a portfolio consisting of a treasury security, the S&P500 index and a call option on the index. PLO results in higher geometric average realized returns with lower tail risk, and lower standard deviation than meanvariance efficient portfolios with the same ex-ante expected returns. It also provides better downside protection against large, negative return surprises, such as the down markets in 2002 and 2008.
UR - https://digitalcommons.stmarys-ca.edu/school-economics-business-faculty-works/76
UR - http://jfbmnet.com/journals/jfbm/Vol_3_No_1_June_2015/4.pdf
U2 - 10.15640/jfbm.v3n1a4
DO - 10.15640/jfbm.v3n1a4
M3 - Article
VL - 3
JO - Journal of Finance and Bank Management
JF - Journal of Finance and Bank Management
ER -