Ambiguity, Prudence and Optimal Portfolio

41 Pages Posted: 26 Mar 2021

See all articles by Fabio Girardi

Fabio Girardi

Goethe University Frankfurt - Finance department

Date Written: February 2021


This paper extends the robust mean-variance analysis of Maccheroni et al. (2013) by investigating the contribution of ambiguity prudence to the optimal stock allocation when the investor evaluates portfolio compositions as described by the smooth model under ambiguity criterion. Ambiguity prudence captures an aversion towards model uncertainty that increases the more the investor believes that unfavourable events are likely to realise. I derive a higher-order approximation of the certainty equivalent to disentangle the contribution of preferences and beliefs. I analyse two relevant portfolio problems to show that ambiguity prudence puts non-linearities into the investor's valuation that induce sizeable variations from the robust mean-variance solution.

Keywords: Ambiguity, portfolio, prudence, robustness, smooth ambiguity model

JEL Classification: D80, D81, G11

Suggested Citation

Girardi, Fabio, Ambiguity, Prudence and Optimal Portfolio (February 2021). Available at SSRN: or

Fabio Girardi (Contact Author)

Goethe University Frankfurt - Finance department ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, Hessen 60323

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