Abstract
We consider a dynamic asset allocation problem formulated as a mean-shortfall model in discrete time. A characterization of the solution is derived analytically under general distributional assumptions for serially independent risky returns. The solution displays risk taking under shortfall, as well as a specific form of time diversification. Also, for a representative stock-return distribution, risk taking increases monotonically with the number of decision moments given a fixed horizon. This is related to the well-known casino effect arising in a downside-risk and expected return framework. As a robustness check, we provide results for a modified objective with a quadratic penalty on shortfall. An analytical solution for a single-stage setup is derived, and numerical results for the two-period model and time diversification are provided. © 2005 INFORMS.
Original language | English |
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Pages (from-to) | 403-414 |
Journal | Operations Research |
Volume | 53 |
Issue number | 3 |
DOIs | |
Publication status | Published - 2005 |