Portfolio Optimization with Optimal Expected Utility Risk Measures

23 Pages Posted: 30 Jun 2019 Last revised: 19 May 2020

See all articles by Holger Fink

Holger Fink

Nuertingen-Geislingen University of Applied Sciences

Sebastian Geissel

University of Applied Sciences Brandenburg

Julia Herbinger

affiliation not provided to SSRN

Frank Thomas Seifried

University of Trier

Date Written: June 30, 2019

Abstract

The purpose of this article is to evaluate optimal expected utility risk measures (OEU) in a risk- constrained portfolio optimization context where the expected portfolio return is maximized. We compare the portfolio optimization with OEU constraint to a portfolio selection model using value at risk as constraint. The former is a coherent risk measure for utility functions with constant relative risk aversion and allows individual specifications to the investor’s risk attitude and time preference. In a case study with three indices we investigate how these theoretical differences influence the performance of the portfolio selection strategies. A copula approach with univariate ARMA-GARCH models is used in a rolling forecast to simulate monthly future returns and calculate the derived measures for the optimization. The results of this study illustrate that both optimization strategies perform considerably better than an equally weighted portfolio and a buy and hold portfolio. Moreover, our results illustrate that portfolio optimization with OEU constraint experiences individualized effects, e.g. less risk averse investors lose more portfolio value in the financial crises but outperform their more risk averse counterparts in bull markets.

Keywords: portfolio optimization, risk measures, value at risk, optimal expected utility

JEL Classification: G11, D81

Suggested Citation

Fink, Holger and Geissel, Sebastian and Herbinger, Julia and Seifried, Frank Thomas, Portfolio Optimization with Optimal Expected Utility Risk Measures (June 30, 2019). Available at SSRN: https://ssrn.com/abstract=3412529 or http://dx.doi.org/10.2139/ssrn.3412529

Holger Fink

Nuertingen-Geislingen University of Applied Sciences ( email )

Sigmaringer Strasse 25
Nuertingen, 72622
Germany

Sebastian Geissel (Contact Author)

University of Applied Sciences Brandenburg ( email )

Brandenburg/Havel, 14770
Germany

Julia Herbinger

affiliation not provided to SSRN

Frank Thomas Seifried

University of Trier ( email )

Department IV - Mathematics
Universitätsring 19
Trier, 54296
Germany

HOME PAGE: http://sites.google.com/site/seifriedfinance/

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