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2
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3answers
82 views

Why do we assume quadratic utility in portfolio theory?

In my text (Investments by BKM), the investor's mean-variance utility (given as $U = E[R] - \frac12A\sigma^2$) is stated to be the objective function we wish to maximize. Upon further digging, it ...
1
vote
1answer
17 views

Explain Four Basic Axioms of Maximising Expected Utility

I begin learn PRM , Someone help me understand Four Basic Axioms of Maximising Expected Utility most intuitive way .Thank you very much
-1
votes
1answer
51 views

Implicit relation between risk and reward

I want to differentiate w.r.t. $\sigma^2$ the following equation $u'(Y)\mu$ + $\frac{u''(Y)}{2}$$(\sigma^2 + \mu^2) = 0$ where we can consider $\mu$(reward) as an implicit function of $\sigma^2$(risk) ...
1
vote
0answers
51 views

stochastic log utility maximization problem, portfolio optimal strategy

Looking for a help with explaining some steps of the logarithmic utility maximization problem where given market with a zero safe rate and risky asset with dynamics $$ \frac{dS_{t}}{S_{t}}=\mu B_t ...
1
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0answers
25 views

Embedding the naive portfolio into economic decision theory

I am trying to gain some insights about the vast literature of portfolio optimization and I hope to get some help when it comes to embed the most standard allocation strategies into a coherent ...
1
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0answers
55 views

Financial theory

Ok guys, I'm studying from Danthine and Donaldson - Intermediate Financial Theory. The book itself doesn't have a lot of worked examples, and I'm lacking the basics for understanding some concepts ...
1
vote
0answers
48 views

Comparing cost of two alternative given their distribution

I have distribution for cost of two alternative through Monte Carlo simulation. The distributions are not normal. Given the benefit of the two alternatives is the same but ungiven, I want to choose ...
0
votes
0answers
19 views

Asset weights in asset allocation

I am trying to solve an asset allocation problem by approximating the expected utility of a portfolio. I am using the following formula: $E_t [U(1 + w_t' r_{t+1} + w_{ft} r_{f, t + 1})] = m_{1,t+1} - ...
0
votes
0answers
29 views

Approximating the conditional expectation in simulations

I am simulating stock returns, which are governed by the following equations $r_t = \mu + \delta r_{t-1} + \sigma_t z_t$ $\sigma^2_t = \omega + \alpha \varepsilon_{t-1}^2 + \beta \sigma^2_{t-1}$ $\...
0
votes
0answers
17 views

Reference Request: Portfolio Optimization Conditional on downside threshold

Under a standard portfolio optimization framework we have some idea of a predictive return distribution $r_{t+1}$ and a Utility function $U(r)$, in the best case in a 'nice' form (differentiable etc.)....