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A new rank dependent utility approach to model risk averse preferences in portfolio optimization

Author

Listed:
  • Leili Javanmardi

    (University of Toronto)

  • Yuri Lawryshyn

    (University of Toronto)

Abstract

In this paper we introduce a new rank dependent utility approach, which unlike existing models, provides an SSD efficient portfolio as a function of the investors’ quantified risk aversion degrees. A parametric family of distortion functions is considered to model various levels of risk aversion. Under assumptions of equally probable scenarios, for any distortion function the corresponding optimization models can be expressed as linear program and easily solved. An empirical study is performed to compare the performance of our proposed model to the previously proposed portfolio selection models in the literature.

Suggested Citation

  • Leili Javanmardi & Yuri Lawryshyn, 2016. "A new rank dependent utility approach to model risk averse preferences in portfolio optimization," Annals of Operations Research, Springer, vol. 237(1), pages 161-176, February.
    • Handle: RePEc:spr:annopr:v:237:y:2016:i:1:d:10.1007_s10479-014-1761-9
    DOI: 10.1007/s10479-014-1761-9
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