How Skewness Influences Optimal Allocation in a Risky Asset

Posted: 21 Oct 2012

See all articles by Martin Eling

Martin Eling

University of St. Gallen - Institute of Insurance Economics; University of Saint Gallen - School of Finance (SoF)

K. Sudheesh

affiliation not provided to SSRN

Luisa Tibiletti

University of Turin - Department of Management

Date Written: October 20, 2012

Abstract

This paper extends the classic Samuelson (1970) and Merton (1973) model of optimal portfolio allocation with one risky asset and a riskless one to include the effect of the skewness. Using an extended version of Stein’s Lemma, we provide the explicit solution for optimal demand that holds for all expected utility maximizing investors when the risky asset is skew-normally and normally distributed. A closed expression is achieved for investors with constant absolute risk aversion (CARA).

Keywords: Stein’s Lemma, optimal asset allocation, skew-normal distribution, skewness

JEL Classification: D81, C10

Suggested Citation

Eling, Martin and Sudheesh, K. and Tibiletti, Luisa, How Skewness Influences Optimal Allocation in a Risky Asset (October 20, 2012). Available at SSRN: https://ssrn.com/abstract=2164803 or http://dx.doi.org/10.2139/ssrn.2164803

Martin Eling

University of St. Gallen - Institute of Insurance Economics ( email )

Kirchlistrasse 2
St. Gallen, 9010
Switzerland

University of Saint Gallen - School of Finance (SoF) ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

K. Sudheesh

affiliation not provided to SSRN ( email )

Luisa Tibiletti (Contact Author)

University of Turin - Department of Management ( email )

C.so Unione Sovietica, 218 bis
Turin, Turin 10100
Italy
39-11-670-6229 (Phone)
39-11-670-6238 (Fax)

HOME PAGE: http://www.management.unito.it/tibiletti

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