Teaching Utility Theory with an Application in Modern Portfolio Optimization

Bai, Lihui; Newsom, Paul; Zhang, Jiang

doi:10.1111/j.1540-4609.2010.00298.x

Cited by 5 publications

(5 citation statements)

References 6 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…According to Bai, et al (2008), investors need to be compensated through higher expected returns for higher levels of risk. Core to the theory is diversification, where investors are considered risk averse, thereby owning different classes of asset portfolios considered less risky compared to owning similar asset portfolios (Mangram, 2013).…”

Section: Modern Portfolio Theorymentioning

confidence: 99%

Influence of asset quality, capital adequacy, loan structure and macro-economic variables on financing of mortgage products by commercial banks in Kenya

Muriithi¹,

Oketch²,

Maina³

2023

TUJ

View full text Add to dashboard Cite

The study sought to determine the influence of asset quality, capital adequacy, loan structure and macro-economic variables on Financing of mortgage products by commercial banks in Kenya. The study used a descriptive research design targeting 196 bank managers including, relationship managers, head of mortgage/retail sales, head of documentation, credit manager, head ofdocumentation, head of finance, and finally head of legal. Data collected was coded and cleaned before undertaking necessary analysis that comprised descriptive and inferential statistics. Descriptive statistics was done by means of frequency tables, mean, standard deviations, charts and figures, while inferential statistics included ANOVA, regression and correlation analysis. The results show that asset quality, capital adequacy, loan structure, macroeconomic variables jointly influence 81.5% of the mortgage financing. Further they were positively and statistically significant in predicting the variation in mortgage financing (F (4, 147) = 161.65, p<.000). The study recommends that banks should consider their credit portfolio in making decisions on financing mortgage products. More so, banks should favour adjustable-rate mortgages as opposed to fixed-rate mortgages and that banks should not charge high loan fee for mortgage products. Finally, it is recommended that banks should support the government housing finance systems by offering various mortgage loan flexibilities to developers of affordable housing products and that it should formulate policy and procedure on mortgages that can support commercial banks in financing mortgage products.

show abstract

Section: Modern Portfolio Theorymentioning

confidence: 99%

Influence of asset quality, capital adequacy, loan structure and macro-economic variables on financing of mortgage products by commercial banks in Kenya

Muriithi¹,

Oketch²,

Maina³

2023

TUJ

View full text Add to dashboard Cite

show abstract

“…to determine the market portfolio, where µ p , r f , and σ p are portfolio mean, risk-free rate, and portfolio standard deviation, respectively. Following Bai et al (2011), the market portfolio is computed by solving:…”

Section: Mean-variancementioning

confidence: 99%

“…From the optimal portfolios, we can proceed to optimize utility (Bai et al 2011;Fahrenwaldt and Sun 2020)…”

Section: Utility Maximizationmentioning

confidence: 99%

Portfolios under Different Methods and Scenarios: A Case of Fiji’s South Pacific Stock Exchange

Kumar

Stauvermann

2022

JRFM

View full text Add to dashboard Cite

In this study, we analyze portfolio performance under different methods and scenarios for the small island economy of Fiji. In addition to documenting the historical performance and the smallness of the stock market, the study looks at the possibility of opting for an equally weighted (naïve) portfolio against market and minimum variance portfolios. To this end, we extract monthly stock price data of 17/19 listed companies from August 2019 to July 2022 and invoke different approaches to develop portfolios under different scenarios. We consider the mean-variance, minimum variance, semi-variance, utility maximization, and minimum turbulence portfolios, based on beta-adjusted (CAPM-based) returns. The different portfolios presented in the study should provide some insights on asset allocation in Fiji’s stock market. Interestingly, unlike average returns, the beta-adjusted returns indicate that an equally weighted portfolio can yield relatively higher expected returns than market portfolios, although, with a relatively higher standard deviation and lower Sharpe ratio than the optimized results. In a semi-variance analysis (where we account for downside risk only), equally weighted portfolio yields superior returns, albeit with a relatively lower Sortino ratio. Given that Fiji’s stock market is currently a small, with a relatively small number of listed companies, potential and less sophisticated investors and analysts considering portfolios based on beta-adjusted returns, may simply opt for 1/N (naïve) portfolios as a diversification strategy while realizing decent expected returns. The optimized portfolio under mean-variance, semi-variance, and utility are presented as alternative considerations for nuanced investors. Additionally, equally weighted turbulence-adjusted and minimum-turbulence portfolios are constructed to capture periods of unusualness and calmness in the market. The methodologies and the results presented can be adjusted and applied to other small markets and hence can influence investment decisions of investors in creating diversified portfolios under different scenarios.

show abstract

“…However, the existing practitioner applied finance literature mainly uses the so-called Generalized Reduced Gradient (GRC) algorithm (e.g., Abadie, 1969), available in the MS Excel Solver function for instance, to optimize more-than-two-asset portfolios (see also Laws, 2003;Grover and Lavin, 2007;Bai et al, 2011). The brute force 3 results obtained using a solver are accurate, which possibly explains the lack of contemporary studies within the Mean-Variance framework.…”

Section: Introductionmentioning

confidence: 99%

Mean–variance efficient large portfolios: a simple machine learning heuristic technique based on the two-fund separation theorem

et al. 2022

View full text Add to dashboard Cite

We revisit in this article the Two-Fund Separation Theorem as a simple technique for the Mean-Variance optimization of large portfolios. The proposed approach is fast and scalable and provides equivalent results of commonly used ML techniques but, with computing time differences counted in hours (1 minute versus several hours). In the empirical application, we consider three geographic areas (China, US, and French stock markets) and show that the Two-Fund Separation Theorem holds exactly when no constraints are imposed and is approximately true with (realistic) positive constraints on weights. This technique is shown to be of interest to both scholars and practitioners involved in portfolio optimization tasks.

show abstract

Teaching Utility Theory with an Application in Modern Portfolio Optimization

Cited by 5 publications

References 6 publications

Influence of asset quality, capital adequacy, loan structure and macro-economic variables on financing of mortgage products by commercial banks in Kenya

Influence of asset quality, capital adequacy, loan structure and macro-economic variables on financing of mortgage products by commercial banks in Kenya

Portfolios under Different Methods and Scenarios: A Case of Fiji’s South Pacific Stock Exchange

Mean–variance efficient large portfolios: a simple machine learning heuristic technique based on the two-fund separation theorem

Contact Info

Product

Resources

About