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Capital allocation to alternatives with a multivariate ladder gamma return distribution

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  • John A. Buzacott

    (York University)

Abstract

This paper considers investment decision making when returns have a multivariate gamma distribution which has the particular correlation structure of Furman’s ladder gamma distribution. With an exponential utility function It is shown that there is a subset of the candidate investment opportunities to which investment should be allocated. This subset can be readily identified in a two step process that results in a list of candidate investments that is ranked in sequence of decreasing risk. The last investment opportunity on this list will be no risk cash. Investments are then selected from this list in sequence up to a cutoff point that depends on the investors capital and degree of risk aversion. If capital and degree of risk aversion are sufficiently large so that it is optimal to allocate some to no risk cash, then the capital allocated to each risky investment is a constant fraction of the total capital allocated to risky investments irrespective of how risk averse is the investor.

Suggested Citation

  • John A. Buzacott, 2016. "Capital allocation to alternatives with a multivariate ladder gamma return distribution," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 39(2), pages 235-258, November.
    • Handle: RePEc:spr:decfin:v:39:y:2016:i:2:d:10.1007_s10203-016-0175-3
    DOI: 10.1007/s10203-016-0175-3
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    References listed on IDEAS

    as
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    3. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, March.
    4. A. Mathal & P. Moschopoulos, 1992. "A form of multivariate gamma distribution," Annals of the Institute of Statistical Mathematics, Springer;The Institute of Statistical Mathematics, vol. 44(1), pages 97-106, March.
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    More about this item

    Keywords

    Investment analysis; Portfolio selection; Ladder gamma distribution; Exponential utility;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • C44 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Operations Research; Statistical Decision Theory

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