Continuous-time mean-variance efficiency: the 80% rule

This paper studies a continuous-time market where an agent, having specified an investment horizon and a targeted terminal mean return, seeks to minimize the variance of the return. The optimal portfolio of such a problem is called mean-variance efficient \`{a} la Markowitz. It is shown that, when the market coefficients are deterministic functions of time, a mean-variance efficient portfolio realizes the (discounted) targeted return on or before the terminal date with a probability greater than 0.8072. This number is universal irrespective of the market parameters, the targeted return and the length of the investment horizon.Comment: Published at http://dx.doi.org/10.1214/105051606000000349 in the Annals of Applied Probability (http://www.imstat.org/aap/) by the Institute of Mathematical Statistics (http://www.imstat.org

MARKETING OF COTTON FIBER IN THE PRESENCE OF YIELD AND PRICE RISK

An expected utility model and a chance constrained linear programming model were used to analyze four marketing strategies and seven crop insurance alternatives in cotton marketing in Georgia. The results obtained suggest that the existing marketing tools and insurance alternatives can be used successfully as a substitute for government support.Demand and Price Analysis, Marketing, Risk and Uncertainty,

Private equity-, stock- and mixed asset-portfolios: a bootstrap approach to determine performance characteristics, diversification benefits and optimal portfolio allocations : [Version: December 2003]

In this article, we investigate risk return characteristics and diversification benefits when private equity is used as a portfolio component. We use a unique dataset describing 642 US-American portfolio companies with 3620 private equity investments. Information about precisely dated cash flows at the company level enables for the first time a cash flow equivalent and simultaneous investment simulation in stocks, as well as the construction of stock portfolios for benchmarking purposes. With respect to the methodology involved, we construct private equity, stock-benchmark and mixed-asset portfolios using bootstrap simulations. For the late 1990s we find a dramatic increase in the extent to which private equity outperforms stock investment. In earlier years private equity was underperforming its stock benchmarks. Within the overall class of private equity, returns on earlier private equity investment categories, like venture capital, show on average higher variations and even higher rates of failure. It is in this category in particular that high average portfolio returns are generated solely by the ability to select a few extremely well performing companies, thus compensating for lost investments. There is a high marginal diversifiable risk reduction of about 80% when the portfolio size is increased to include 15 investments. When the portfolio size is increased from 15 to 200 there are few marginal risk diversification effects on the one hand, but a large increase in managing expenditure on the other, so that an actual average portfolio size between 20 and 28 investments seems to be well balanced. We provide empirical evidence that the non-diversifiable risk that a constrained investor, who is exclusively investing in private equity, has to hold exceeds that of constrained stock investors and also the market risk. From the viewpoint of unconstrained investors with complete investment freedom, risk can be optimally reduced by constructing mixed asset portfolios. According to the various private equity subcategories analyzed, there are big differences in optimal allocations to this asset class for minimizing mixed-asset portfolio variance or maximizing performance ratios. We observe optimal portfolio weightings to be between 3% and 65%

Asset Pricing Theories, Models, and Tests

An important but still partially unanswered question in the investment field is why different assets earn substantially different returns on average. Financial economists have typically addressed this question in the context of theoretically or empirically motivated asset pricing models. Since many of the proposed “risk” theories are plausible, a common practice in the literature is to take the models to the data and perform “horse races” among competing asset pricing specifications. A “good” asset pricing model should produce small pricing (expected return) errors on a set of test assets and should deliver reasonable estimates of the underlying market and economic risk premia. This chapter provides an up-to-date review of the statistical methods that are typically used to estimate, evaluate, and compare competing asset pricing models. The analysis also highlights several pitfalls in the current econometric practice and offers suggestions for improving empirical tests

Theory and Applications of Robust Optimization

In this paper we survey the primary research, both theoretical and applied, in the area of Robust Optimization (RO). Our focus is on the computational attractiveness of RO approaches, as well as the modeling power and broad applicability of the methodology. In addition to surveying prominent theoretical results of RO, we also present some recent results linking RO to adaptable models for multi-stage decision-making problems. Finally, we highlight applications of RO across a wide spectrum of domains, including finance, statistics, learning, and various areas of engineering.Comment: 50 page

Portfolio saliency and ministerial turnover: Dynamics in Scandinavian postwar cabinets

© 2013 The Author(s) Scandinavian Political Studies © 2013 Nordic Political Science Association. This is the accepted version of the following article: Hansen, M. E., Klemmensen, R., Hobolt, S. B. and Bäck, H. (2013), Portfolio Saliency and Ministerial Turnover: Dynamics in Scandinavian Postwar Cabinets. Scandinavian Political Studies, 36: 227–248, which has been published in final form at http://onlinelibrary.wiley.com/doi/10.1111/1467-9477.12004/abstract.Why do certain ministers remain in their post for years while others have their time in office cut short? Drawing on the broader literature on portfolio allocation, this article argues that the saliency of individual portfolios shapes ministerial turnover. The main argument is that ministerial dismissals are less likely to occur the higher the saliency attributed to the ministerial portfolio since ministers appointed to important posts are more likely to have been through extensive screening before appointment. Importantly, it is also posited in the article that the effect of portfolio salience is conditioned by government approval ratings: when government ratings are on the decline, prime ministers are less likely to reshuffle or fire important ministers than when approval ratings are improving. To test these claims, Cox proportional hazards models are applied to a new dataset on ministerial turnover in Scandinavia during the postwar period. The results strongly support the proposition that portfolio saliency matters for ministerial survival, and that this effect is moderated by government popularity

Private equity-, stock- and mixed asset-portfolios: A bootstrap approach to determine performance characteristics, diversification benefits and optimal portfolio allocations

In this article, we investigate risk return characteristics and diversification benefits when private equity is used as a portfolio component. We use a unique dataset describing 642 US-American portfolio companies with 3620 private equity investments. Information about precisely dated cash flows at the company level enables for the first time a cash flow equivalent and simultaneous investment simulation in stocks, as well as the construction of stock portfolios for benchmarking purposes. With respect to the methodology involved, we construct private equity, stock-benchmark and mixed-asset portfolios using bootstrap simulations. For the late 1990s we find a dramatic increase in the extent to which private equity outperforms stock investment. In earlier years private equity was underperforming its stock benchmarks. Within the overall class of private equity, returns on earlier private equity investment categories, like venture capital, show on average higher variations and even higher rates of failure. It is in this category in particular that high average portfolio returns are generated solely by the ability to select a few extremely well performing companies, thus compensating for lost investments. There is a high marginal diversifiable risk reduction of about 80% when the portfolio size is increased to include 15 investments. When the portfolio size is increased from 15 to 200 there are few marginal risk diversification effects on the one hand, but a large increase in managing expenditure on the other, so that an actual average portfolio size between 20 and 28 investments seems to be well balanced. We provide empirical evidence that the non-diversifiable risk that a constrained investor, who is exclusively investing in private equity, has to hold exceeds that of constrained stock investors and also the market risk. From the viewpoint of unconstrained investors with complete investment freedom, risk can be optimally reduced by constructing mixed asset portfolios. According to the various private equity subcategories analyzed, there are big differences in optimal allocations to this asset class for minimizing mixed-asset portfolio variance or maximizing performance ratios. We observe optimal portfolio weightings to be between 3% and 65%.Venture Capital, Private Equity, Performance, Return, Risk, Portfolio, Fund, Diversification, Efficient Frontier, Allocation