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Portfolio Selection with Monotone Mean-Variance Preferences

Author

Listed:
  • Fabio Maccheroni
  • Massimo Marinacci
  • Aldo Rustichini
  • Marco Taboga

Abstract

We propose a portfolio selection model based on a class of monotone preferences that coincide with mean-variance preferences on their domain of monotonicity, but differ where mean-variance preferences fail to be monotone and are therefore not economically meaningful. The functional associated to this new class of preferences is the best approximation of the mean-variance functional among those which are monotonic. We solve the portfolio selection problem and we derive a monotone version of the CAPM, which has two main features: (i) it is, unlike the standard CAPM model, arbitrage free, (ii) it has empirically testable CAPM-like relations. The monotone CAPM has thus a sounder theoretical foundation than the standard CAPM and a comparable empirical tractability.

Suggested Citation

  • Fabio Maccheroni & Massimo Marinacci & Aldo Rustichini & Marco Taboga, 2004. "Portfolio Selection with Monotone Mean-Variance Preferences," Carlo Alberto Notebooks 6, Collegio Carlo Alberto, revised 2007.
    • Handle: RePEc:cca:wpaper:6
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    More about this item

    Keywords

    Mean-Variance Preferences; Optimal Portfolios;

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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