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Probability of Survival as an Investment Criterion

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  • Fred Hanssmann

    (University of Munich, Germany)

Abstract

Suppose that an investing firm is primarily interested in achieving a specified minimum return critical to its economic survival. Then it seems appropriate to maximize the probability of exceeding the aspiration level. This decision criterion will be applied in the context of several stochastic static investment models with budget constraint. As long as the aspiration level does not exceed the maximum expected return achievable with the given budget, the desired investment strategy must be sought among the efficient solutions in the Markowitz sense. For higher aspiration levels this is no longer true. For the special case of the Markowitz model we show that all investment projects with expected yield not exceeding the aspiration level (of yield) should be rejected. This is a surprising confirmation of a well-known deterministic rule of investment theory and practice in a rather different context.

Suggested Citation

  • Fred Hanssmann, 1968. "Probability of Survival as an Investment Criterion," Management Science, INFORMS, vol. 15(1), pages 33-48, September.
    • Handle: RePEc:inm:ormnsc:v:15:y:1968:i:1:p:33-48
    DOI: 10.1287/mnsc.15.1.33
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    Cited by:

    1. Haley, M. Ryan & McGee, M. Kevin, 2011. ""KLICing" there and back again: Portfolio selection using the empirical likelihood divergence and Hellinger distance," Journal of Empirical Finance, Elsevier, vol. 18(2), pages 341-352, March.
    2. Haley, M. Ryan & McGee, M. Kevin, 2006. "Tilting safety first and the Sharpe portfolio," Finance Research Letters, Elsevier, vol. 3(3), pages 173-180, September.
    3. Levy, Haim & Levy, Moshe, 2009. "The safety first expected utility model: Experimental evidence and economic implications," Journal of Banking & Finance, Elsevier, vol. 33(8), pages 1494-1506, August.
    4. M. Ryan Haley & Harry J. Paarsch & Charles H. Whiteman, 2013. "Smoothed safety first and the holding of assets," Quantitative Finance, Taylor & Francis Journals, vol. 13(2), pages 167-176, January.
    5. Yang, Zhenbing & Zhao, Ziyi & Shao, Shuai & Yang, Lili, 2023. "Carbon regulation and enterprise investment: Evidence from China," Energy Economics, Elsevier, vol. 128(C).
    6. Akhter Mohiuddin Rather & V. N. Sastry & Arun Agarwal, 2017. "Stock market prediction and Portfolio selection models: a survey," OPSEARCH, Springer;Operational Research Society of India, vol. 54(3), pages 558-579, September.

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