Portfolio Selection and the Analysis of Risk and Time Diversification
(2001) In Lund Economic Studies 96. Abstract (Swedish)
 Popular Abstract in Swedish
Denna avhandling behandlar tre centrala områden i finansiell ekonomi i allmänhet och portföljvalsteori i synnerhet: riskmåttet, estimeringsrisk och tidsdiversifiering. Avhandlingen består av fem kapitel varav ett är ett kort introduktionskapitel. De första två kapitlen behandlar ett alternativt mått på risk, lower partial moment (LPM). Detta alternativa mått behandlar endast icke önskvärda utfall som riskfyllda vilket står ni kontrast till det traditionella riskmåttet, varians, i vilket alla utfall anses riskfyllda. Resultaten indikerar att LPM är praktiskt tillämpbart trots att det är svårare att estimera bland annat pga. hög estimeringsrisk. Dessutom tyder de empiriska resultaten på att LPM... (More)  Popular Abstract in Swedish
Denna avhandling behandlar tre centrala områden i finansiell ekonomi i allmänhet och portföljvalsteori i synnerhet: riskmåttet, estimeringsrisk och tidsdiversifiering. Avhandlingen består av fem kapitel varav ett är ett kort introduktionskapitel. De första två kapitlen behandlar ett alternativt mått på risk, lower partial moment (LPM). Detta alternativa mått behandlar endast icke önskvärda utfall som riskfyllda vilket står ni kontrast till det traditionella riskmåttet, varians, i vilket alla utfall anses riskfyllda. Resultaten indikerar att LPM är praktiskt tillämpbart trots att det är svårare att estimera bland annat pga. hög estimeringsrisk. Dessutom tyder de empiriska resultaten på att LPM fungerar bättre än varians som riskmått i vissa fall. De sista två kapitlena behandlar tidsdiversifiering dvs. huruvida investerare som har en lång placeringshorisont ska investera relativt mer i aktier än någon med en kort placeringshorisont. Resultaten visar att det populära rådet är riktigt – investerare med lång placeringshorisont ska investera mer i aktier. (Less)  Abstract
 This thesis is devoted to the analysis of three important issues in financial economics in general and portfolio selection in particular: the risk measure, estimation risk and time diversification. Besides a short introductory chapter the thesis consists of four empirical essays. In the second chapter, the effect of estimation risk on the efficient frontier in the lower partial moment framework is analyzed. A simulation approach is employed for the analysis of estimation risk in the MLPMmodel because it can directly show the effect and magnitude of the estimation error on the portfolios. The results of the average difference between the actual and estimated portfolios show that the estimated portfolios are biased predictors of the actual... (More)
 This thesis is devoted to the analysis of three important issues in financial economics in general and portfolio selection in particular: the risk measure, estimation risk and time diversification. Besides a short introductory chapter the thesis consists of four empirical essays. In the second chapter, the effect of estimation risk on the efficient frontier in the lower partial moment framework is analyzed. A simulation approach is employed for the analysis of estimation risk in the MLPMmodel because it can directly show the effect and magnitude of the estimation error on the portfolios. The results of the average difference between the actual and estimated portfolios show that the estimated portfolios are biased predictors of the actual portfolios in that they underestimate the risk in the portfolios and overestimate the portfolio mean returns. However, the estimates of the optimal portfolios can be improved. If our concern is the uncertainty in the optimal portfolio weights, then a bootstrap approach should be used to improve the optimizations since this approach produces the lowest rootmean squared errors in the study. In the third chapter, a downside risk approximation for calculating optimal portfolios in the discretetime dynamic investment model is compared to the exact power function formulation that springs from the dynamic reinvestment model. The results show that the downside risk model approximates the dynamic model surprisingly well under both quarterly and annual revisions. However, the approximation seems to be correlated with the target rate of return in the downside risk formulation. In addition, the results suggest that the approximation perform best when the target rate of return is set high as compared to the mean returns of the basic assets. The fourth chapter analyzes whether or not meanvariance efficient portfolio weights for stocks and bills vary significantly with the investment horizon in a buyandhold strategy. Real returns from the U.S. asset market on a monthly basis from 1900 to 1997 were used in the analysis. As far as the question of estimation risk is concerned, the results showed that the estimation errors increased with the risk tolerance and with the investment horizon. However, the results in this study indicate that the optimal weights in stocks are not independent of the investment horizon, and that whether or not investors should tilt their portfolio weight towards or away from stocks in long horizon portfolios depends on the investor's risk aversion. The fifth chapter contains an analysis of whether the portfolio weights for stocks and bills, which are formed on the basis of direct expected utility maximization for a set of utility functions, vary significantly with the investment horizon. A nonparametric bootstrap approach is employed, which allows us to draw conclusions on whether or not differences between optimal portfolios are significant. Our analysis shows that the weights for stocks are significantly higher for long horizon investment as compared to the oneyear horizon. We conclude that time diversification exists, and that the allocation decision seems to be independent of the utility function. (Less)
Please use this url to cite or link to this publication:
http://lup.lub.lu.se/record/41691
 author
 Persson, Mattias ^{LU}
 opponent

 Werner, Ingrid, Associate Professor of Finance, Ohio State University
 organization
 publishing date
 2001
 type
 Thesis
 publication status
 published
 subject
 keywords
 economic policy, economic systems, economic theory, econometrics, Economics, Lower Partial Moment, Portfolio Selection, Parameter Uncertainty, Time Diversification, Bootstrap, Downside Risk, Estimation Risk, Nationalekonomi, ekonometri, ekonomisk teori, ekonomiska system, ekonomisk politik, Financial science, Finansiering
 in
 Lund Economic Studies
 volume
 96
 pages
 112 pages
 publisher
 Department of Economics, Lund Universtiy
 defense location
 EC3:210 Holger Crafoords Ekonomicentrum
 defense date
 20010605 10:15
 ISSN
 04600029
 ISBN
 917874136X
 language
 English
 LU publication?
 yes
 id
 97816b7c46b449a1bf8f898878dab891 (old id 41691)
 date added to LUP
 20070801 08:33:44
 date last changed
 20160919 08:44:57
@phdthesis{97816b7c46b449a1bf8f898878dab891, abstract = {This thesis is devoted to the analysis of three important issues in financial economics in general and portfolio selection in particular: the risk measure, estimation risk and time diversification. Besides a short introductory chapter the thesis consists of four empirical essays. In the second chapter, the effect of estimation risk on the efficient frontier in the lower partial moment framework is analyzed. A simulation approach is employed for the analysis of estimation risk in the MLPMmodel because it can directly show the effect and magnitude of the estimation error on the portfolios. The results of the average difference between the actual and estimated portfolios show that the estimated portfolios are biased predictors of the actual portfolios in that they underestimate the risk in the portfolios and overestimate the portfolio mean returns. However, the estimates of the optimal portfolios can be improved. If our concern is the uncertainty in the optimal portfolio weights, then a bootstrap approach should be used to improve the optimizations since this approach produces the lowest rootmean squared errors in the study. In the third chapter, a downside risk approximation for calculating optimal portfolios in the discretetime dynamic investment model is compared to the exact power function formulation that springs from the dynamic reinvestment model. The results show that the downside risk model approximates the dynamic model surprisingly well under both quarterly and annual revisions. However, the approximation seems to be correlated with the target rate of return in the downside risk formulation. In addition, the results suggest that the approximation perform best when the target rate of return is set high as compared to the mean returns of the basic assets. The fourth chapter analyzes whether or not meanvariance efficient portfolio weights for stocks and bills vary significantly with the investment horizon in a buyandhold strategy. Real returns from the U.S. asset market on a monthly basis from 1900 to 1997 were used in the analysis. As far as the question of estimation risk is concerned, the results showed that the estimation errors increased with the risk tolerance and with the investment horizon. However, the results in this study indicate that the optimal weights in stocks are not independent of the investment horizon, and that whether or not investors should tilt their portfolio weight towards or away from stocks in long horizon portfolios depends on the investor's risk aversion. The fifth chapter contains an analysis of whether the portfolio weights for stocks and bills, which are formed on the basis of direct expected utility maximization for a set of utility functions, vary significantly with the investment horizon. A nonparametric bootstrap approach is employed, which allows us to draw conclusions on whether or not differences between optimal portfolios are significant. Our analysis shows that the weights for stocks are significantly higher for long horizon investment as compared to the oneyear horizon. We conclude that time diversification exists, and that the allocation decision seems to be independent of the utility function.}, author = {Persson, Mattias}, isbn = {917874136X}, issn = {04600029}, keyword = {economic policy,economic systems,economic theory,econometrics,Economics,Lower Partial Moment,Portfolio Selection,Parameter Uncertainty,Time Diversification,Bootstrap,Downside Risk,Estimation Risk,Nationalekonomi,ekonometri,ekonomisk teori,ekonomiska system,ekonomisk politik,Financial science,Finansiering}, language = {eng}, pages = {112}, publisher = {Department of Economics, Lund Universtiy}, school = {Lund University}, series = {Lund Economic Studies}, title = {Portfolio Selection and the Analysis of Risk and Time Diversification}, volume = {96}, year = {2001}, }