Scandinavian Working Papers in Economics
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Department of Economics, Lund University Working Papers, Department of Economics, Lund University

No 2008:1:
Mean-Variance vs. Full-Scale Optimization: Broad Evidence for the UK

Björn Hagströmer (), Richard G. Anderson (), Jane Binner (), Thomas Elger and Birger Nilsson ()

Abstract: In the Full-Scale Optimization approach the complete empirical financial return probability distribution is considered; and the utility maximizing solution is found through numerical optimization. Using a portfolio choice setting of three UK equity indices we identify several utility functions featuring loss aversion and prospect theory; under which Full-Scale Optimization is a substantially better approach than the mean-variance approach. As the equity indices have return distributions with small deviations from normality; the findings indicate much broader usefulness of Full-Scale Optimization than has earlier been shown. The results hold in and out of sample; and the performance improvements are given in terms of utility as well as certainty equivalents.

Keywords: portfolio choice; utility maximization; full-scale optimization; S-shaped utility; bilinear utility; (follow links to similar papers)

JEL-Codes: G11; (follow links to similar papers)

32 pages, October 24, 2007

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This paper is published as:
Hagströmer, Björn, Richard G. Anderson, Jane Binner, Thomas Elger and Birger Nilsson, (2008), 'Mean-Variance vs. Full-Scale Optimization: Broad Evidence for the UK', The Manchester School, Vol. 76, pages 134-156

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