Title

Downside Loss Aversion and Portfolio Growth

Status

Faculty

School

School of Economics and Business Administration

Department

Finance

Document Type

Article

Publication Date

6-2015

Publication Title

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.

Volume

3

Issue

1

First Page

37

Last Page

46

Scholarly

yes

DOI

10.15640/jfbm.v3n1a4

Disciplines

Business | Economics

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

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