Downside Loss Aversion and Portfolio Growth
SMC Affiliated Work
School of Economics and Business Administration
Journal of Finance and Bank Management
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.
Business | Economics
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
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