Ambiguity and Optimal Portfolio Choice with Value-at-Risk Constraint
Posted: 10 May 2014 Last revised: 8 Apr 2016
Date Written: September 21, 2015
Integrating a Value-at-Risk constraint on a fund manager's wealth and ambiguity, we present a model of optimal portfolio choice for a fund manager who allocates her wealth between risky and riskless assets. When a fund manager controls asset composition, her reactions dier with respect to an increase in only risk aversion and only ambiguity aversion. When the sum of coecients of risk aversion and ambiguity aversion is fixed, the effect of risk aversion on risky investment dominates the effect of ambiguity aversion in that stock holdings are dramatically smaller in the absence of ambiguity aversion than in its presence.
Keywords: ambiguity aversion, optimal portfolio, value at risk, expected shortfall, fund management
JEL Classification: C61, G11, G12
Suggested Citation: Suggested Citation