Skip to main content

Lund University Publications

LUND UNIVERSITY LIBRARIES

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)
Please use this url to cite or link to this publication:
author
organization
publishing date
type
Working paper/Preprint
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 University
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
2016-04-04 10:02:50
date last changed
2018-11-21 20:56:24
@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}},
  keywords     = {{portfolio choice; utility maximization; full-scale}},
  language     = {{eng}},
  note         = {{Working Paper}},
  number       = {{1}},
  publisher    = {{Department of Economics, Lund University}},
  series       = {{Working Papers, Department of Economics, Lund University}},
  title        = {{Mean-Variance vs. Full-Scale Optimization: Broad Evidence for the UK}},
  url          = {{http://swopec.hhs.se/lunewp/abs/lunewp2008_001.htm}},
  year         = {{2008}},
}