TY - JOUR

T1 - Portfolio selection with monotone mean-variance preferences

AU - MacCheroni, Fabio

AU - Marinacci, Massimo

AU - Rustichini, Aldo

AU - Taboga, Marco

PY - 2009/7/1

Y1 - 2009/7/1

N2 - 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.

AB - 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.

KW - Capital asset pricing model

KW - Monotone approximation

KW - Monotone mean-variance

KW - Portfolio selection

UR - http://www.scopus.com/inward/record.url?scp=67650784378&partnerID=8YFLogxK

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U2 - 10.1111/j.1467-9965.2009.00376.x

DO - 10.1111/j.1467-9965.2009.00376.x

M3 - Article

AN - SCOPUS:67650784378

VL - 19

SP - 487

EP - 521

JO - Mathematical Finance

JF - Mathematical Finance

SN - 0960-1627

IS - 3

ER -