Mostly Prior-Free Asset Allocation
34 Pages Posted: 16 Feb 2018
Date Written: February 14, 2018
This paper develops a prior-free version of Harry Markowitz’s efficient portfolio theory, which allows the decision maker to express their preferences with regard to risk and reward, even though they are unable to express a prior over potentially nonstationary returns. The corresponding optimal allocation strategies are admissible and interior, and they exhibit a form of momentum. Empirically, prior-free efficient allocation strategies successfully exploit the time-varying risk premiums present in historical returns.
Keywords: prior-free asset allocation, minmax drawdown control, nonstationary returns, fear-of-missing-out, fear-of-loss, regret aversion
Suggested Citation: Suggested Citation