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Choosing Investment Portfolios When the Returns Have Stable Distributions

37 citations0/0 files storedWorld Scientific handbook in financial economic series

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Risk and Portfolio Optimization Financial Markets and Investment Strategies Stochastic processes and financial applications

Abstract

This paper presents an efficient method for computing approximately optimal portfolios when the returns have symmetric stable distributions and there are many alternative investments. The procedure is valid, in particular, for independent investments and for multivariate investments of the classes introduced by Press and Samuelson. The algorithm is based on a two-stage decomposition of the problem and is analogous to the procedure developed by the author that is available for normally distributed investments utilizing Lintner's reformulation of Tobin's separation theorem…

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1970EFFICIENT CAPITAL MARKETS: A REVIEW OF THEORY AND EMPIRICAL WORK*1965The Behavior of Stock-Market Prices 1975THE VALUATION OF RISK ASSETS AND THE SELECTION OF RISKY INVESTMENTS IN STOCK PORTFOLIOS AND CAPITAL BUDGETS**This paper is another in a series of interrelated theoretical and statistical studies of corporate financial and investment policies being made under grants from the Rockefeller Foundation, and more recently the Ford Foundation, to the Harvard Business School. The generous support for this work is most gratefully acknowledged. The author is also much indebted to his colleagues Professors Bishop, Christenson, Kahr, Raiffa, and (especially) Schlaifer, for extensive discussion and commentary on an earlier draft of this paper; but responsibility for any errors or imperfections remains strictly his own.[Professor Sharpe's paper, “Capital Asset Prices: A Theory of Market Equilibrium Under Conditions of Risk” (Journal of Finance, September 1964) appeared after this paper was in final form and on its way to the printers. My first section, which parallels the first half of his paper (with corresponding conclusions), sets the algebraic framework for sections II, III and VI, (which have no counterpart in his paper) and for section IV on the equilibrium prices of risk assets, concerning which our results differ significantly for reasons which will be explored elsewhere. Sharpe does not take up the capital budgeting problem developed in section V below.]1997The variation of certain speculative prices 1958Liquidity Preference as Behavior Towards Risk 1963A Simplified Model for Portfolio Analysis 1969The Efficiency Analysis of Choices Involving Risk 1967On the Distribution of Stock Price Differences

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