On the Computation of Optimal Monotone Mean-Variance Portfolios via Truncated Quadratic Utility

Abstract

We report a surprising link between optimal portfolios generated by a special type of variational preferences called divergence preferences (cf. Maccheroni et al. 2006) and optimal portfolios generated by classical expected utility. As a special case we connect optimization of truncated quadratic utility (cf. Cerny 2003) to the optimal monotone mean-variance portfolios (cf. Maccheroni et al.2007), thus simplifying the computation of the latter.

Keywords: optimal portfolio, truncated quadratic utility, monotone mean-variance preferences, divergence preferences, HARA utility

JEL Classification: G11, D81, C61