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Safety Third: Roy's Criterion and Higher Order Moments

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  • Steven E. Pav

Abstract

Roy's `Safety First' criterion for selecting one risky asset from many is adapted to the case of non-normal returns, via Cornish Fisher expansion. The resulting investment objective is consistent with first order stochastic dominance, and is equal to the Sharpe ratio for the case of normal returns. An investor selecting assets via this objective is not universally attracted to positive skew, rather the preference for skew depends on term, the expected return and the disastrous rate of return.

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  • Steven E. Pav, 2015. "Safety Third: Roy's Criterion and Higher Order Moments," Papers 1506.04227, arXiv.org.
  • Handle: RePEc:arx:papers:1506.04227
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    References listed on IDEAS

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    4. Jaschke, Stefan R., 2001. "The Cornish-Fisher-Expansion in the context of Delta - Gamma - Normal approximations," SFB 373 Discussion Papers 2001,54, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
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    6. L. Eeckhoudt & C. Gollier & H. Schlesinger, 2005. "Economic and financial decisions under risk," Post-Print hal-00325882, HAL.
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