Mean-Variance vs. Full-Scale Optimization: Broad Evidence for the UK
Author
Summary, in English
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.
Department/s
Publishing year
2008
Language
English
Publication/Series
Working Papers, Department of Economics, Lund University
Issue
1
Links
Document type
Working paper
Publisher
Department of Economics, Lund University
Topic
- Economics
Keywords
- portfolio choice
- utility maximization
- full-scale
Status
Published