Asymmetries and Portfolio Choice

51 Pages Posted: 13 May 2015 Last revised: 20 Jul 2016

See all articles by Magnus Dahlquist

Magnus Dahlquist

Stockholm School of Economics; Swedish House of Finance

Adam Farago

University of Gothenburg - Centre for Finance

Roméo Tédongap

ESSEC Business School

Multiple version iconThere are 2 versions of this paper

Date Written: July 19, 2016


We examine the portfolio choice of an investor with generalized disappointment-aversion preferences who faces log returns described by a normal-exponential model. We derive a three-fund separation strategy: the investor allocates wealth to a risk-free asset, a standard mean-variance efficient fund, and an additional fund reflecting return asymmetries. The optimal portfolio is characterized by the investor’s endogenous effective risk aversion and implicit asymmetry aversion. In empirical applications, we find that disappointment aversion is associated with much larger asymmetry aversion than are standard preferences. Our model explains patterns in popular portfolio advice across both risk appetites and investment horizons.

Keywords: Asset allocation, disappointment aversion, downside risk, loss aversion, reference-dependent preferences, skewness.

JEL Classification: G11

Suggested Citation

Dahlquist, Magnus and Farago, Adam and Tédongap, Roméo, Asymmetries and Portfolio Choice (July 19, 2016). Swedish House of Finance Research Paper No. 15-09, Available at SSRN: or

Magnus Dahlquist (Contact Author)

Stockholm School of Economics ( email )

Drottninggatan 98
Stockholm, SE-111 60

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm

Adam Farago

University of Gothenburg - Centre for Finance ( email )

Box 640
Gothenburg, 405 30

Roméo Tédongap

ESSEC Business School ( email )

Avenue Bernard Hirsch
BP 105 Cergy Cedex, 95021
+33134439734 (Phone)
+33134439734 (Fax)

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