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Ordering of Optimal Portfolio Allocations in a Model with a Mixture of Fundamental Risks

Part of: Distribution theory - Probability Applications

Published online by Cambridge University Press:  14 July 2016

Ka Chun Cheung  and
Hailiang Yang
Ka Chun Cheung*
Affiliation:
University of Calgary
Hailiang Yang*
Affiliation:
The University of Hong Kong
*
∗Postal address: Department of Mathematics and Statistics, University of Calgary, Calgary, Alberta, T3A 2E2, Canada. Email address: kccheung@math.ucalgary.ca
∗∗Postal address: Department of Statistics and Actuarial Science, The University of Hong Kong, Pokfulam Road, Hong Kong.
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Abstract

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In this paper we study a single-period optimal portfolio problem in which the aim of the investor is to maximize the expected utility. We assume that the return of every security in the market is a mixture of some common underlying source of risks. A sufficient condition to order the optimal allocations is obtained, and it is shown that several models studied in the literature before are special cases of the proposed model. In the course of the analysis concepts in stochastic orders are employed, and a new characterization of the likelihood ratio order is obtained.

Keywords

Asset allocationstochastic orderdependence structurecomonotonicityweak convergencelikelihood ratio order

MSC classification

Secondary: 62P05: Applications to actuarial sciences and financial mathematics 60E15: Inequalities; stochastic orderings
Type
Research Article
Information
Journal of Applied Probability , Volume 45 , Issue 1 , March 2008 , pp. 55 - 66
Copyright
Copyright © Applied Probability Trust 2008 

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