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Cumulative Prospect Theory with Skewed Return Distribution

Authors: Minsuk Kwak; Traian A. Pirvu;

Cumulative Prospect Theory with Skewed Return Distribution

Abstract

We investigate a one-period portfolio optimization problem of a cumulative prospect theory (CPT) investor with multiple risky assets and one risk-free asset. The returns of multiple risky assets follow multivariate generalized hyperbolic (GH) skewed t distribution. We obtain a three-fund separation result of two risky portfolios and risk-free asset. Furthermore, we reduce the high dimensional optimization problem to two 1-dimensional optimization problems and derive the optimal portfolio. We show that the optimal portfolio composition changes as some of investor-specific parameters change. It is observed that the consideration of skewness of stock return distribution has considerable impact on the distribution of CPT investor's wealth deviation, and leads to less total risky investment.

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selected citations
These citations are derived from selected sources.
This is an alternative to the "Influence" indicator, which also reflects the overall/total impact of an article in the research community at large, based on the underlying citation network (diachronically).
BIP!Citations provided by BIP!
popularity
This indicator reflects the "current" impact/attention (the "hype") of an article in the research community at large, based on the underlying citation network.
BIP!Popularity provided by BIP!
influence
This indicator reflects the overall/total impact of an article in the research community at large, based on the underlying citation network (diachronically).
BIP!Influence provided by BIP!
impulse
This indicator reflects the initial momentum of an article directly after its publication, based on the underlying citation network.
BIP!Impulse provided by BIP!
2
Average
Average
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