Reference : Mean-Variance versus Mean-VaR and Mean-Utility Spanning
Parts of books : Contribution to collective works
Business & economic sciences : Finance
Mean-Variance versus Mean-VaR and Mean-Utility Spanning
Bodson, Laurent mailto [Université de Liège - ULiège > HEC - École de gestion de l'ULiège > Gestion financière >]
Hübner, Georges [Université de Liège - ULiège > HEC - École de gestion de l'ULiège > Gestion financière >]
Stock Market Volatility Book
Gregoriou, Greg N.
[en] Variance ; Modified Value-at-Risk ; Utility-Based Risk Measure ; Optimal Allocation ; Spanning ; Efficient Frontiers
[en] In this chapter, we contrast the optimal spanning properties of portfolios built under the traditional mean-variance (VAR) or mean-modified value-at-risk (MVaR) approaches with those created with the linear-exponential (linex) utility function. Unlike asset allocation procedures that build on volatility or MVaR as a measure of risk and a single risk aversion parameter that characterizes investors, the use of linex utility introduces risk differentiation amongst investors and the risk-return relation of the optimal portfolio trades off between mean, variance, skewness and kurtosis. We identify efficient portfolios under the three competing frameworks and analyze their optimal allocations.

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