Portfolio Choice Beyond the Traditional Approach

Abstract

This paper surveys asset allocation methods that extend the traditional approach. An important feature of the the traditional approach is that measures the risk and return tradeoff in terms of mean and variance of final wealth. However, there are also other important features that are not always made explicit in terms of investor's wealth, information, and horizon: The investor makes a single portfolio choice based only on the mean and variance of her final financial wealth and she knows the relevant parameters in that computation. First, the paper describes traditional portfolio choice based on four basic assumptions, while the rest of the sections extend those assumptions. Each section will describe the corresponding equilibrium implications in terms of portfolio advice and asset pricing.

Assessing the risk-return trade-off in loan portfolios

“…This is an interesting difference with equity return distributions, in which positive extreme returns may also occur (see e.g. Peñaranda, 2008, for a detailed discussion). Hence, the covariance matrix provides a much better measure of left tail risk in the absence of a right tail above the required rate.…”