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Portfolio Performance Evaluation with Loss Aversion

Quantitative Finance, Forthcoming

21 Pages Posted: 5 Jan 2010 Last revised: 6 Sep 2011

Valeriy Zakamulin

University of Agder - School of Business and Law

Date Written: January 4, 2010

Abstract

In this paper we consider a loss averse investor equipped with a specific, but still quite general, utility function motivated by behavioral finance. We show that under some concrete assumptions about the form of this utility one can derive closed-form solutions for the investor's portfolio performance measure. We investigate the effects of loss aversion and demonstrate its important role in performance measurement. The framework presented in this paper also provides a sound theoretical foundation for all known performance measures based on partial moments of distribution.

Keywords: utility theory, behavioral finance, portfolio performance evaluation, performance measure, reward-to-risk ratio, loss aversion

JEL Classification: D81, G11

Suggested Citation

Zakamulin, Valeriy, Portfolio Performance Evaluation with Loss Aversion (January 4, 2010). Quantitative Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1531094

Valeriy Zakamulin (Contact Author)

University of Agder - School of Business and Law ( email )

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HOME PAGE: http://vzakamulin.weebly.com/

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