Pi Portfolio Management: Reaching Goals While Avoiding Drawdowns

24 Pages Posted: 7 Sep 2019

See all articles by Jaksa Cvitanic

Jaksa Cvitanic

California Institute of Technology - Division of the Humanities and Social Sciences

Steven Kou

Boston University

Xiangwei Wan

Shanghai Jiao Tong University - Antai College of Economics & Management

Karyn Williams

Hightree Advisors LLC

Date Written: August 30, 2019

Abstract

We propose an approach to portfolio selection that explicitly takes into account investors’ simultaneous investment objectives, such as achieving target return levels and avoiding specific drawdowns. Our approach is consistent with both standard and non-standard risk preferences, such as those of prospect theory. Instead of asking the investor to choose between lotteries, transforming this into an estimate of the risk preferences, and then selecting the portfolio accordingly, we propose to directly offer investors a choice between “portfolio lotteries'' with varying probabilities of experiencing target levels of profits and losses. Our approach enables investors to flexibly assess the effectiveness of portfolio choices under various conditions. We discuss implementation considerations and compare our approach to traditional mean-variance portfolio selection.

Suggested Citation

Cvitanic, Jaksa and Kou, Steven and Wan, Xiangwei and Williams, Karyn L., Pi Portfolio Management: Reaching Goals While Avoiding Drawdowns (August 30, 2019). Available at SSRN: https://ssrn.com/abstract=3444836 or http://dx.doi.org/10.2139/ssrn.3444836

Jaksa Cvitanic (Contact Author)

California Institute of Technology - Division of the Humanities and Social Sciences ( email )

1200 East California Blvd.
Pasadena, CA 91125
United States

HOME PAGE: http://www.hss.caltech.edu/~cvitanic/

Steven Kou

Boston University ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States
6173583318 (Phone)

Xiangwei Wan

Shanghai Jiao Tong University - Antai College of Economics & Management ( email )

No.1954 Huashan Road
Shanghai Jiao Tong University
Shanghai, Shanghai 200052
China
+86-21-52301570 (Phone)

Karyn L. Williams

Hightree Advisors LLC ( email )

100 Wilshire Boulevard Suite 700
Santa Monica, CA 90401
United States

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