Title

Downside Loss Aversion and Portfolio Growth

SMC Author

Jivendra Kale, Arnav Sheth,

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

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