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Optimal Asset Allocation: A Worst Scenario Expectation Approach

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Abstract

Mean-variance criterion has long been the main stream approach in the optimal portfolio theory. The investors try to balance the risk and the return on their portfolio. In this paper, the deviation of the asset return from the investor’s expectation in the worst scenario is used as the measure of risk for portfolio selection. One important advantage of this approach is that the investors can base on their own knowledge, information, and preference on various risks, in addition to the asset’s volatility, to adjust their exposure to various risks. It also pinpoints one main concern of the investors when they invest, the amount they lose in the worst situation.

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Authors and Affiliations

  1. Department of Actuarial Mathematics and Statistics, and the Maxwell Institute for Mathematical Sciences, Heriot-Watt University, Edinburgh, EH14 4AS, UK

    Fei Lung Yuen

  2. Department of Statistics and Actuarial Science, The University of Hong Kong, Pokfulam Road, Hong Kong, Hong Kong

    Hailiang Yang

Authors
  1. Fei Lung Yuen
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  2. Hailiang Yang
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Correspondence to Fei Lung Yuen.

Additional information

Communicated by Kok Lay Teo.

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Yuen, F.L., Yang, H. Optimal Asset Allocation: A Worst Scenario Expectation Approach. J Optim Theory Appl 153, 794–811 (2012). https://doi.org/10.1007/s10957-011-9972-6

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  • DOI: https://doi.org/10.1007/s10957-011-9972-6

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