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Risk and potential : an asset allocation framework with applications to robo-advising
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Cui, Xiang-Yu, Li, Duan, Qiao, Xiao and Strub, Moris S. (2022) Risk and potential : an asset allocation framework with applications to robo-advising. Journal of the Operations Research Society of China, 10 (3). pp. 529-558. doi:10.1007/s40305-022-00400-0 ISSN 2194-668X.
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Official URL: http://dx.doi.org/10.1007/s40305-022-00400-0
Abstract
We propose a novel dynamic asset allocation framework based on a family of mean-variance-induced utility functions that alleviate the non-monotonicity and time-inconsistency problems of mean-variance optimization. The utility functions are motivated by the equivalence between the mean-variance objective and a quadratic utility function. Crucially, our framework differs from mean-variance analysis in that we allow different treatment of upside and downside deviations from a target wealth level. This naturally leads to a different characterization of possible investment outcomes below and above a target wealth as risk and potential. Our proposed asset allocation framework retains two attractive features of mean-variance optimization: an intuitive explanation of the investment objective and an easily computed optimal strategy. We establish a semi-analytical solution for the optimal trading strategy in our framework and provide numerical examples to illustrate its behavior. Finally, we discuss applications of this framework to robo-advisors.
| Item Type: | Journal Article | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| Divisions: | Faculty of Social Sciences > Warwick Business School | ||||||||
| Journal or Publication Title: | Journal of the Operations Research Society of China | ||||||||
| Publisher: | Springer | ||||||||
| ISSN: | 2194-668X | ||||||||
| Official Date: | September 2022 | ||||||||
| Dates: |
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| Volume: | 10 | ||||||||
| Number: | 3 | ||||||||
| Page Range: | pp. 529-558 | ||||||||
| DOI: | 10.1007/s40305-022-00400-0 | ||||||||
| Status: | Peer Reviewed | ||||||||
| Publication Status: | Published | ||||||||
| Access rights to Published version: | Restricted or Subscription Access |
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