Work

Portfolio Selection With Monotone Mean‐variance Preferences

Year: 2009

Type: article

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 with 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 capital asset pricing model (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.

Source: Mathematical Finance

DOI: 10.1111/j.1467-9965.2009.00376.x

Authors: Fabio Maccheroni, Massimo Marinacci, Aldo Rustichini, Marco Taboga

Institutions: Bocconi University, Collegio Carlo Alberto, University of Turin, University of Minnesota, Bank of Italy

Language: English

Topic: Risk and Portfolio Optimization

Subfield: Management Science and Operations Research

Field: Decision Sciences

Domain: Social Sciences

Open Access status: green

OpenAlex ID: W2240115526

FWCI: 90.76

Cites: 179

Cited by: 416

Related to: 10