Downside Loss Aversion and Portfolio Growth
SMC Affiliated Work
1
Status
Faculty
School
School of Economics and Business Administration
Department
Finance
Document Type
Article
Publication Date
6-2015
Publication / Conference / Sponsorship
Journal of Finance and Bank Management
Description/Abstract
Optimizing over power-log utility functions allow for the inclusion of downside loss aversion, a broader range of investor preferences, and account for higher-order moments like skewness and kurtosis in the optimization process. We implement multi-period power-log optimization (PLO) with annual rebalancing on a portfolio consisting of a treasury security, the S&P500 index and a call option on the index. PLO results in higher geometric average realized returns with lower tail risk, and lower standard deviation than meanvariance efficient portfolios with the same ex-ante expected returns. It also provides better downside protection against large, negative return surprises, such as the down markets in 2002 and 2008.
Scholarly
yes
Peer Reviewed
1
DOI
10.15640/jfbm.v3n1a4
Volume
3
Issue
1
First Page
37
Last Page
46
Disciplines
Business | Economics
Rights
Open Access journal
Original Citation
Jivendra K. Kale, Arnav Sheth. “Downside Loss Aversion and Portfolio Growth,” in the Journal of Finance and Bank Management, June 2015, Vol. 3, No. 1, pp. 37-46. http://dx.doi.org/10.15640/jfbm.v3n1a4
Repository Citation
Kale, Jivendra and Sheth, Arnav. Downside Loss Aversion and Portfolio Growth (2015). Journal of Finance and Bank Management. 3 (1), 37-46. 10.15640/jfbm.v3n1a4 [article]. https://digitalcommons.stmarys-ca.edu/school-economics-business-faculty-works/76
