A Comparison of the Mean-Variance-Leverage Optimization Model and the Markowitz General Mean-Variance Portfolio Selection Model

10 Pages Posted: 11 Sep 2013

See all articles by Bruce I. Jacobs, Ph.D.

Bruce I. Jacobs, Ph.D.

Jacobs Levy Equity Management

Kenneth N. Levy

Jacobs Levy Equity Management

Date Written: August 5, 2013

Abstract

The mean-variance-leverage (MVL) optimization model (Jacobs and Levy 2012, 2013a) tackles an issue not dealt with by the mean-variance optimization inherent in the general mean-variance portfolio selection model (GPSM) — that is, the impact on investor utility of the risks that are unique to using leverage. Relying on leverage constraints with a conventional GPSM, as is commonly done today, is unlikely to lead to the portfolio offering a leverage-averse investor the highest utility. But investors can use the MVL model to find optimal portfolios that balance expected return, volatility risk, and leverage risk. The MVL model has intuitive appeal and offers straightforward implementation for portfolio selection. In contrast, practical use of a broader application of GPSM, as suggested by Markowitz (2013), is dependent on successful future development of a stochastic margin-call model (SMCM).

Keywords: Risk Management, Modern Portfolio Theory, Mean Variance Utility, Portfolio Optimization, Efficient Frontier, Portfolio Choice, Risk Aversion, Volatility Aversion, Volatility Tolerance, Leverage Aversion, Leverage Tolerance, Efficient Surface, Efficient Region, Portfolio Optimality, MVL, GPSM

JEL Classification: G11

Suggested Citation

Jacobs, Bruce I. and Levy, Kenneth N., A Comparison of the Mean-Variance-Leverage Optimization Model and the Markowitz General Mean-Variance Portfolio Selection Model (August 5, 2013). Forthcoming, The Journal of Portfolio Management, Vol. 40, No. 1, Fall 2013. Available at SSRN: https://ssrn.com/abstract=2323906

Bruce I. Jacobs (Contact Author)

Jacobs Levy Equity Management ( email )

100 Campus Drive
P.O. Box 650
Florham Park, NJ 07932-0650
United States
973-410-9222 (Phone)
973-410-9333 (Fax)

HOME PAGE: https://jlem.com/who-we-are#/nav/founders

Kenneth N. Levy

Jacobs Levy Equity Management ( email )

100 Campus Drive
P.O. Box 650
Florham Park, NJ 07932-0650
United States
973-410-9222 (Phone)
973-410-9333 (Fax)

HOME PAGE: https://jlem.com/who-we-are#/nav/founders

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