publication . Other literature type . Article . Research . 2012 . Embargo end date: 01 Jul 2012

Cumulative prospect theory and mean-variance analysis: a rigorous comparison

Hens, Thorsten; Mayer, Janos;
  • Published: 01 Jul 2012
  • Publisher: University of Zurich
  • Country: Switzerland
Abstract
We propose a numerical optimization approach that can be used to solve portfolio selection problems including several assets and involving objective functions from cumulative prospect theory (CPT). Implementing the suggested algorithm, we compare asset allocations that are derived for CPT based on two different methods: maximizing CPT along the mean–variance efficient frontier so that simple mean–variance algorithms can be used, and maximizing CPT without this restriction. According to the theoretical literature, with normally distributed returns and unlimited short sales, these two approaches lead to the same optimal solutions. We find that for empirical finite...
Subjects
free text keywords: Department of Banking and Finance, 330 Economics, Mathematical optimization, Efficient frontier, Asset allocation, Cluster analysis, Expected utility hypothesis, Normal distribution, Economics, Cumulative prospect theory, Portfolio, Skewness, Pension, Analysis of variance, Econometrics, Derivative (finance)
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publication . Other literature type . Article . Research . 2012 . Embargo end date: 01 Jul 2012

Cumulative prospect theory and mean-variance analysis: a rigorous comparison

Hens, Thorsten; Mayer, Janos;