Quantile Maximizing Safety-First Investors: Separation, Performance Measurement and Capital Market Equilibrium

Abstract

We combine the safety-first principle of Te lser (1955/56) and Arzac and Bawa (1977) with the principle of quantile maximization studied in Rostek (2010). While maintaining the short- fall constraint of the safety-first principle, we propose to maximize an upper quantile of the return distribution instead of maximizing its exp ected value. We study the implications of this new decision principle for portfolio selection and capital market equilibrium on one hand and for risk-adjusted performance measurement on the other hand