Models of Capital Budgeting, E-V Vs E-S

Mao, James C. T.

doi:10.2307/2330119

Cited by 172 publications

(58 citation statements)

References 4 publications

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“…As is well known, in the case of non-normally distributed asset returns, the mean-variance criterion for optimal portfolio decisions of investors can only be justified by quite unrealistic assumptions, such as a quadratic utility function (Mao, 1970, Samuelson, 1970, and thus a linear function for marginal utility (or stochastic discount factors) and the market return. An appealing framework to avoid the shortcomings of the mean-variance paradigm is the concept of stochastic dominance.…”

Section: B Stochastic Dominance Efficiency Testsmentioning

confidence: 99%

International Diversification Benefits with Foreign Exchange Investment Styles

2011

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Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW.Download this ZEW Discussion Paper from our ftp server:ftp://ftp.zew.de/pub/zew-docs/dp/dp11028.pdf Abstract This paper provides a comprehensive analysis of portfolio choice with popular foreign exchange (FX) investment styles such as carry trades and strategies commonly known as FX momentum, and FX value. We investigate if diversification benefits can be achieved by style investing in FX markets relative to a benchmark allocation consisting of U.S. bonds, U.S. stocks, and international stocks. Overall, our results suggest that there are significant improvements in international portfolio diversification due to style-based investing in FX markets (both in the statistical, and most importantly, in the economic sense). These results prevail for the most important investment styles after accounting for transaction costs due to re-balancing of currency positions, and also hold in out-of-sample tests. Moreover, these gains do not only apply to a mean-variance investor but we also show that international portfolios augmented by FX investment styles are superior in terms of second and third order stochastic dominance. Thus, even an investor who dislikes negatively skewed return distributions would prefer a portfolio augmented by FX investment styles compared to the benchmark. Non-technical SummaryJEL-Classification: G11, G12, G15

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Section: B Stochastic Dominance Efficiency Testsmentioning

confidence: 99%

International Diversification Benefits with Foreign Exchange Investment Styles

2011

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“…The same argument is also valid for the VaR measures. Correspondingly, Markowitz (1959) and Mao (1970a) show that the constant reference point's Semi-Variance is consistent with the maximization of expected utility using a utility function which guarantees the more-over-less preference and risk aversion assumptions. In section III we show that this is also true in the case of AVaR t , which is presented below, although not in the case of VaR t .…”

Section: A1 the Var With Expected Mean As Reference Point (Var E )mentioning

confidence: 56%

VaR Risk Measures versus Traditional Risk Measures: An Analysis and Survey

Kaplanski

Kroll

2002

SSRN Journal

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“…Downside risk is an asymmetric risk measure that only focuses on downside and does not require normal distribution assumption. This risk measure is intuitively appealing and in-line with a survey undertaken by Mao (1970) where investors only dislike downside likelihood, while upside likelihood is viewed as favourable upside potential. Additionally, downside risk also emerges as an appropriate risk measure in skewed return distribution by effectively accommodating the non-normality in skewed return distribution and accurately estimating the risk for skewed assets.…”

Section: Introductionmentioning

confidence: 69%