Abstract
In this paper we investigate a continuous-time portfolio selection problem.
Instead of using the classical variance as usual, we use earnings-at-risk (EaR) of terminal wealth as a measure of risk. In the settings of Black-Scholes type financial
markets and constantly-rebalanced portfolio (CRP) investment strategies, we obtain
closed-form expressions for the best CRP investment strategy and the efficient frontier of the mean-EaR problem, and compare our mean-EaR analysis to the classical
mean-variance analysis and to the mean-CaR (capital-at-risk) analysis. We also examine some economic implications arising from using the mean-EaR model.
Instead of using the classical variance as usual, we use earnings-at-risk (EaR) of terminal wealth as a measure of risk. In the settings of Black-Scholes type financial
markets and constantly-rebalanced portfolio (CRP) investment strategies, we obtain
closed-form expressions for the best CRP investment strategy and the efficient frontier of the mean-EaR problem, and compare our mean-EaR analysis to the classical
mean-variance analysis and to the mean-CaR (capital-at-risk) analysis. We also examine some economic implications arising from using the mean-EaR model.
| Original language | English |
|---|---|
| Pages (from-to) | 459-473 |
| Journal | Journal of Optimization Theory and Applications |
| Volume | 132 |
| Issue number | 3 |
| DOIs | |
| Publication status | Published - 2007 |
| Externally published | Yes |