Evaluating the impact of inequality constraints and parameter uncertainty on optimal portfolio choice

Hall, AD; Satchell, SE; Spence, PJ

Evaluating the impact of inequality constraints and parameter uncertainty on optimal portfolio choice

Hall, AD

Satchell, SE Spence, PJ

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Publication Type:: Journal Article
Citation:: Applied Economics, 2015, 47 (45), pp. 4801 - 4813
Issue Date:: 2015-01-01

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Field	Value	Language
dc.contributor.author	Hall, AD https://orcid.org/0000-0002-9724-951X	en_US
dc.contributor.author	Satchell, SE	en_US
dc.contributor.author	Spence, PJ	en_US
dc.date.available	2020-05-25T19:06:15Z
dc.date.issued	2015-01-01	en_US
dc.identifier.citation	Applied Economics, 2015, 47 (45), pp. 4801 - 4813	en_US
dc.identifier.issn	0003-6846	en_US
dc.identifier.uri	http://hdl.handle.net/10453/35925
dc.description.abstract	© 2015 Taylor & Francis. We present new analytical results for the impact of portfolio weight constraints on an investor’s optimal portfolio when parameter uncertainty is taken into account. While it is well known that parameter uncertainty and imposing weight constraints results in reduced certainty equivalent returns, in the general case, there are no analytical results. In a special case, commonly used in the funds management literature, we derive analytical expression for the certainty equivalent loss that does not depend on the risk aversion parameter. We illustrate our theoretical results using hedge fund data, from the perspective of a fund-of-fund manager. Our contribution is to formalize the framework to investigate this problem, as well as providing tractable analytical solutions that can be implemented using either simulated or asset manager returns.	en_US
dc.relation.ispartof	Applied Economics	en_US
dc.relation.isbasedon	10.1080/00036846.2015.1034845	en_US
dc.subject.classification	Economics	en_US
dc.title	Evaluating the impact of inequality constraints and parameter uncertainty on optimal portfolio choice	en_US
dc.type	Journal Article
utslib.citation.volume	45	en_US
utslib.citation.volume	47	en_US
utslib.for	1402 Applied Economics	en_US
utslib.for	1502 Banking, Finance and Investment	en_US
utslib.for	1403 Econometrics	en_US
pubs.embargo.period	Not known	en_US
pubs.organisational-group	/University of Technology Sydney
pubs.organisational-group	/University of Technology Sydney/Faculty of Business
utslib.copyright.status	open_access
pubs.issue	45	en_US
pubs.publication-status	Published	en_US
pubs.volume	47	en_US

Abstract:

© 2015 Taylor & Francis. We present new analytical results for the impact of portfolio weight constraints on an investor’s optimal portfolio when parameter uncertainty is taken into account. While it is well known that parameter uncertainty and imposing weight constraints results in reduced certainty equivalent returns, in the general case, there are no analytical results. In a special case, commonly used in the funds management literature, we derive analytical expression for the certainty equivalent loss that does not depend on the risk aversion parameter. We illustrate our theoretical results using hedge fund data, from the perspective of a fund-of-fund manager. Our contribution is to formalize the framework to investigate this problem, as well as providing tractable analytical solutions that can be implemented using either simulated or asset manager returns.

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http://hdl.handle.net/10453/35925