Title: Pi Portfolio Management: Reaching Goals While Avoiding Drawdowns
Abstract: We propose a new objective for portfolio optimization: a weighted average of the probabilitiesof achieving specific target levels and avoiding specific loss levels. The objective is relatively easyto understand by non-experts, making it easier to calibrate to individuals’ risk profiles. Moreover,our approach is consistent with both standard and non-standard risk preferences, such as thoseof prospect theory. Comparing the associated optimal portfolio to the optimal mean-variance andMerton’s portfolios, in our setting the one-fund theorem still holds, but the holdings in the riskyassets are nonlinear in their risk premium and/or their return rates. Our model helps explainthe complicated risk seeking and risk aversion behavior as the level of wealth and time change,observed for fund managers.
Publication Year: 2019
Publication Date: 2019-01-01
Language: en
Type: article
Indexed In: ['crossref']
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Cited By Count: 3
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