PORTFOLIO OPTIMIZATION UNDER PARAMETER UNCERTAINTY USING THE RISK AVERSION FORMULA

Robustness-based portfolio optimization under epistemic uncertainty

In this paper, we propose formulations and algorithms for robust portfolio optimization under both aleatory uncertainty (i.e., natural variability) and epistemic uncertainty (i.e., imprecise probabilistic information) arising from interval data. Epistemic uncertainty is represented using two approaches: (1) moment bounding approach and (2) likelihood-based approach. This paper first proposes a ...

Parameter Uncertainty in Credit Risk Portfolio Models

Minimax Portfolio Optimization Under Interval Uncertainty

In the 1950s, Markowitz proposed to combine different investment instruments to design a portfolio that either maximizes the expected return under constraints on volatility (risk) or minimizes the risk under given expected return. Markowitz’s formulas are still widely used in financial practice. However, these formulas assume that we know the exact values of expected return and variance for eac...

Duopolistic competition under risk aversion and uncertainty

A monopolist typically defers entry into an industry as both price uncertainty and the level of relative risk aversion increase. The former attribute may be present in most deregulated industries, while the latter may be relevant for reasons of market incompleteness or the presence of technical uncertainty. By contrast, it has been shown that the presence of a rival hastens entry under risk neu...

Optimal Portfolio Series Formula under Dynamic Appreciation Rate Uncertainty

A closed-form series solution formula for the problem of optimal portfolio diversification under dynamic (possibly, long-term-memory) appreciation rate uncertainty, for an investor with HARA utility, is discovered. To that end a calculus of variations method, recently introduced by the author, was extended. The usefulness of the obtained result is examined by means of solving a few guiding exam...