TY - JOUR
T1 - The 1/N investment strategy is optimal under high model ambiguity
AU - Pflug, Georg Ch
AU - Pichler, Alois
AU - Wozabal, David
PY - 2012/2
Y1 - 2012/2
N2 - The 1/. N investment strategy, i.e. the strategy to split one's wealth uniformly between the available investment possibilities, recently received plenty of attention in the literature. In this paper, we demonstrate that the uniform investment strategy is rational in situations where an agent is faced with a sufficiently high degree of model uncertainty in the form of ambiguous loss distributions. More specifically, we use a classical risk minimization framework to show that, for a broad class of risk measures, as the uncertainty concerning the probabilistic model increases, the optimal decisions tend to the uniform investment strategy.To illustrate the theoretical results of the paper, we investigate the Markowitz portfolio selection model as well as Conditional Value-at-Risk minimization with ambiguous loss distributions. Subsequently, we set up a numerical study using real market data to demonstrate the convergence of optimal portfolio decisions to the uniform investment strategy.
AB - The 1/. N investment strategy, i.e. the strategy to split one's wealth uniformly between the available investment possibilities, recently received plenty of attention in the literature. In this paper, we demonstrate that the uniform investment strategy is rational in situations where an agent is faced with a sufficiently high degree of model uncertainty in the form of ambiguous loss distributions. More specifically, we use a classical risk minimization framework to show that, for a broad class of risk measures, as the uncertainty concerning the probabilistic model increases, the optimal decisions tend to the uniform investment strategy.To illustrate the theoretical results of the paper, we investigate the Markowitz portfolio selection model as well as Conditional Value-at-Risk minimization with ambiguous loss distributions. Subsequently, we set up a numerical study using real market data to demonstrate the convergence of optimal portfolio decisions to the uniform investment strategy.
KW - Model uncertainty
KW - Risk aware planning
KW - Robust optimization
UR - http://www.scopus.com/inward/record.url?scp=81955161130&partnerID=8YFLogxK
U2 - 10.1016/j.jbankfin.2011.07.018
DO - 10.1016/j.jbankfin.2011.07.018
M3 - Article
AN - SCOPUS:81955161130
SN - 0378-4266
VL - 36
SP - 410
EP - 417
JO - Journal of Banking and Finance
JF - Journal of Banking and Finance
IS - 2
ER -