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Choice Under Uncertainty and Portfolio Optimization in a Static Framework: The Markowitz Model

In: Capital Market Finance

Author

Listed:
  • Patrice Poncet

    (ESSEC Business School)

  • Roland Portait

    (ESSEC Business School)

Abstract

Section 21.1 presents the theory of choice under uncertainty with a brief exposition of the expected utility criterion (Von Neuman and Morgenstern, VNM) and the Mean-Variance (MV) paradigm. Section 21.2 is devoted to an intuitive presentation of the main concepts of portfolio theory such as efficient frontier and diversification. Section 21.3 rigorously presents the mathematical analysis of the static portfolio selection strategies by an investor who respects the MV criterion (Markowitz model) under the assumption that short positions are allowed. Section 21.4 offers various extensions of the standard model: no short positions, preferences described by HARA utilities (whose compliance with the MV criterion is only a special case), loss aversion and other behaviors not always consistent with VNM rationality.

Suggested Citation

  • Patrice Poncet & Roland Portait, 2022. "Choice Under Uncertainty and Portfolio Optimization in a Static Framework: The Markowitz Model," Springer Texts in Business and Economics, in: Capital Market Finance, chapter 21, pages 873-928, Springer.
    • Handle: RePEc:spr:sptchp:978-3-030-84600-8_21
    DOI: 10.1007/978-3-030-84600-8_21
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