Portfolio selection with monotone mean-variance preferences

Fabio MacCheroni, Massimo Marinacci, Aldo Rustichini, Marco Taboga

Research output: Contribution to journalArticlepeer-review

32 Scopus citations

Abstract

We propose a portfolio selection model based on a class of monotone preferences that coincide with mean-variance preferences on their domain of monotonicity, but differ where mean-variance preferences fail to be monotone and are therefore not economically meaningful. The functional associated with this new class of preferences is the best approximation of the mean-variance functional among those which are monotonic. We solve the portfolio selection problem and we derive a monotone version of the capital asset pricing model (CAPM), which has two main features: (i) it is, unlike the standard CAPM model, arbitrage free, (ii) it has empirically testable CAPM-like relations. The monotone CAPM has thus a sounder theoretical foundation than the standard CAPM and a comparable empirical tractability.

Original languageEnglish (US)
Pages (from-to)487-521
Number of pages35
JournalMathematical Finance
Volume19
Issue number3
DOIs
StatePublished - Jul 1 2009

Keywords

  • Capital asset pricing model
  • Monotone approximation
  • Monotone mean-variance
  • Portfolio selection

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