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Optimal Asset Allocation: A Worst Scenario Expectation Approach

Author

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  • Fei Lung Yuen

    (Heriot-Watt University)

  • Hailiang Yang

    (The University of Hong Kong)

Abstract

Mean-variance criterion has long been the main stream approach in the optimal portfolio theory. The investors try to balance the risk and the return on their portfolio. In this paper, the deviation of the asset return from the investor’s expectation in the worst scenario is used as the measure of risk for portfolio selection. One important advantage of this approach is that the investors can base on their own knowledge, information, and preference on various risks, in addition to the asset’s volatility, to adjust their exposure to various risks. It also pinpoints one main concern of the investors when they invest, the amount they lose in the worst situation.

Suggested Citation

  • Fei Lung Yuen & Hailiang Yang, 2012. "Optimal Asset Allocation: A Worst Scenario Expectation Approach," Journal of Optimization Theory and Applications, Springer, vol. 153(3), pages 794-811, June.
    • Handle: RePEc:spr:joptap:v:153:y:2012:i:3:d:10.1007_s10957-011-9972-6
    DOI: 10.1007/s10957-011-9972-6
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    References listed on IDEAS

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    Cited by:

    1. Yam, Sheung Chi Phillip & Yang, Hailiang & Yuen, Fei Lung, 2016. "Optimal asset allocation: Risk and information uncertainty," European Journal of Operational Research, Elsevier, vol. 251(2), pages 554-561.
    2. Ben-Zhang Yang & Xiaoping Lu & Guiyuan Ma & Song-Ping Zhu, 2020. "Robust Portfolio Optimization with Multi-Factor Stochastic Volatility," Journal of Optimization Theory and Applications, Springer, vol. 186(1), pages 264-298, July.
    3. Ben-Zhang Yang & Xiaoping Lu & Guiyuan Ma & Song-Ping Zhu, 2019. "Robust portfolio optimization with multi-factor stochastic volatility," Papers 1910.06872, arXiv.org, revised Jun 2020.

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