An analysis of portfolio selection with multiplicative background risk

Guo, Xu and Wong, Wing-Keung and Zhu, Lixing (2013): An analysis of portfolio selection with multiplicative background risk.

Abstract

This paper investigates the impact of multiplicative background risk on an investor's portfolio choice in a mean-variance framework. We also study the efficient boundary frontiers with and without risk-free security.

• Item Type: MPRA Paper
• Language: English
• Keywords: Background risk; Portfolio selection; VaR; CVaR
• Subjects: C - Mathematical and Quantitative Methods > C0 - General > C02 - Mathematical Methods; G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice ; Investment Decisions

References

Baptista, A.M., (2008). Optimal delegated portfolio management with background risk. Journal of Banking and Finance 32, 977–985.

Baptista, A.M., (2012). Portfolio Selection with Mental Accounts and Background Risk, Journal of Banking and Finance 36, 968-980.

Eeckhoudt, L. , Gollier, C and Schlesinger, H. (1996). Changes in Background Risk and Risk Taking Behavior, Econometrica 64, 683-689.

Eichner, T., (2008). Mean variance vulnerability. Management Science 54, 586-593.

Eichner, T., Wagener, A., (2003). Variance vulnerability, background risks, and mean--variance preferences. Geneva Papers on Risk and Insurance Theory 28, 173-184.

Eichner, T., Wagener, A., (2009). Multiple risks and mean--variance preferences. Operations Research 57, 1142-1154.

Franke, G., Schlesinger, H., Stapleton, R.C., (2006). Multiplicative background risk. Management Science 52, 146-153.

Franke, G., Schlesinger, H., Stapleton, R.C. (2011). Risk Taking with Additive and Multiplicative Background Risks. Journal of Economic Theory 146, 1547-1568.

Gollier, C., Pratt, J.W., (1996). Risk vulnerability and the tempering effect of background risk. Econometrica 64, 1109-1123.

Hara, C., Huang, J. and Kuzmics, C. (2011), Effects of background risks on cautiousness with an application to a portfolio choice problem. Journal of Economic Theory 146, 346-358.

Heaton, J., Lucas, D., (2000). Portfolio choice in the presence of background risk. Economic Journal 110, 1-26.

Jiang, C.H., Ma, Y.K., An, Y.B., (2010). An analysis of portfolio selection with background risk. Journal of Banking and Finance 34, 3055-3060.

Lajeri-Chaherli, F., (2002). More on properness: the case of mean–variance preferences. Geneva Papers on Risk and Insurance Theory 27, 49–60.

Lajeri-Chaherli, F., (2005). Proper and standard risk aversion in two-moment decision models. Theory and Decision 57, 213–225.

Li, J. (2011). The Demand for a Risky Asset in the Presence of a Background Risk. Journal of Economic Theory 146, 372-391.

Merton, R.C., (1972). An analytic derivation of the efficient portfolio frontier. Journal of Financial and Quantitative Analysis 4, 1851-1872.

Sévi, B. (2010). The newsvendor problem under multiplicative background risk European Journal of Operational Research 200, 918-923.

Tsetlin, I., Winkler, R.L., (2005). Risky choices and correlated background risk. Management Science 51, 1336-1345.

Wagener, A. (2002). Prudence and risk vulnerability in two-moment decision models. Economics Letters 74, 229-235.