Abstract
Expected utility theory is nowadays accepted as the standard for rational choice among risky assets. However, as Harry Markowitz recently pointed out, the problem of how the maximum expected utility along the risk–return portfolio efficient frontiers approximates the exact maximum expected utility is still open. This paper shows that some popular risk–return models are actually able to approximate expected utility maximization with respect to classical and new distance measures. It also analyzes the ability of the whole risk–return efficient frontiers to approximate the exact one. Our empirical analysis is based on recent publicly available real-world data sets.
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Acknowledgements
The authors wish to thank Harry M Markowitz for his interest in this research and for his encouragement. Furthermore, they are grateful to Fabio Tardella for his helpful support and feedback, and to two anonymous referees for their constructive comments.
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Carleo, A., Cesarone, F., Gheno, A. et al. Approximating exact expected utility via portfolio efficient frontiers. Decisions Econ Finan 40, 115–143 (2017). https://doi.org/10.1007/s10203-017-0201-0
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DOI: https://doi.org/10.1007/s10203-017-0201-0