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Mean-Variance vs. Full-Scale Optimization: Broad Evidence for the UK

Nilsson, Birger LU (2008) In Working Papers, Department of Economics, Lund University
Abstract
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... (More)
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. (Less)
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author
organization
publishing date
type
Working Paper
publication status
published
subject
keywords
portfolio choice, utility maximization, full-scale
in
Working Papers, Department of Economics, Lund University
issue
1
publisher
Department of Economics, Lund Universtiy
language
English
LU publication?
yes
id
40bdca38-b0ef-496d-8d00-a901ab875fea (old id 1387590)
alternative location
http://swopec.hhs.se/lunewp/abs/lunewp2008_001.htm
date added to LUP
2009-04-20 12:27:26
date last changed
2016-04-16 07:23:14
@misc{40bdca38-b0ef-496d-8d00-a901ab875fea,
  abstract     = {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.},
  author       = {Nilsson, Birger},
  keyword      = {portfolio choice,utility maximization,full-scale},
  language     = {eng},
  note         = {Working Paper},
  number       = {1},
  publisher    = {Department of Economics, Lund Universtiy},
  series       = {Working Papers, Department of Economics, Lund University},
  title        = {Mean-Variance vs. Full-Scale Optimization: Broad Evidence for the UK},
  year         = {2008},
}