Utility Analysis of Chance-Constrained Portfolio Selection
Single-period portfolio selection deals with the allocation of an investor's initial wealth to a finite number of risky assets according to his preferences over random final wealth. The purpose of this article is to study chance-constrained portfolio selection from the point of view of utility theory. The second section of the article relates the chance-constrained model to utility theory and shows that some of its solutions may be inefficient, that is, nonoptimal for all utility functions in the class implied by its formulation. It also shows how to exclude inefficient solutions. The third section relates the efficiency analysis of chance-constrained choices to the stochastic dominance literature. The fourth section studies the characteristics of chance-constrained solutions when the assets follow a multinormal disutility functions related to the chance-constrained model. It is necessary to derive the complete chance-constrained solution locus in order to obtain efficient portfolios of its convexity cannot be established a priori.
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Source: Journal of Financial and Quantitative Analysis
Arzac, Enrique. "Utility Analysis of Chance-Constrained Portfolio Selection." Journal of Financial and Quantitative Analysis 9, no. 6 (December 1974): 993-1007.
Date: 12 1974
Descriptors: Financial Economics