Portfolio Selection with Monotone Mean-Variance Preferences

35 Pages Posted: 30 Jun 2009

See all articles by Fabio Maccheroni

Fabio Maccheroni

Bocconi University - Department of Decision Sciences

Massimo Marinacci

University of Turin - Department of Statistics and Applied Mathematics

Aldo Rustichini

University of Minnesota - Twin Cities - Department of Economics

Marco Taboga

Bank of Italy

Multiple version iconThere are 2 versions of this paper

Date Written: 2007-12

Abstract

We propose a portfolio selection model based on a class of monotone preferences that coincide with mean-variance preferences on their domain of monotonicity, but differ where mean-variance preferences fail to be monotone and are therefore not economically meaningful. The functional associated with this new class of preferences is the best approximation of the mean-variance functional among those which are monotonic. We solve the portfolio selection problem and we derive a monotone version of the capital asset pricing model (CAPM), which has two main features: (i) it is, unlike the standard CAPM model, arbitrage free, (ii) it has empirically testable CAPM-like relations. The monotone CAPM has thus a sounder theoretical foundation than the standard CAPM and a comparable empirical tractability.

Suggested Citation

Maccheroni, Fabio and Marinacci, Massimo and Rustichini, Aldo and Taboga, Marco, Portfolio Selection with Monotone Mean-Variance Preferences (2007-12). Mathematical Finance, Vol. 19, Issue 3, pp. 487-521, July 2009. Available at SSRN: https://ssrn.com/abstract=1426633 or http://dx.doi.org/10.1111/j.1467-9965.2009.00376.x

Fabio Maccheroni (Contact Author)

Bocconi University - Department of Decision Sciences ( email )

Via Roentgen 1
Milan, 20136
Italy

Massimo Marinacci

University of Turin - Department of Statistics and Applied Mathematics ( email )

Piazza Arbarello 8
Turin, I-10122
Italy

HOME PAGE: http://web.econ.unito.it/gma/massimo.htm

Aldo Rustichini

University of Minnesota - Twin Cities - Department of Economics ( email )

271 19th Avenue South
Minneapolis, MN 55455
United States

Marco Taboga

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

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