Taylor series approximations to expected utility and optimal portfolio choice
This paper revisits the subject of Taylor series approximations to expected utility and investigates the applicability of the technique to optimal portfolio choice problems. We first provide conditions under which the approximate expected utility of a given portfolio converges to its exact counterpa...
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| Veröffentlicht in: | Mathematics and financial economics 2011-09, Vol.5 (2), p.121-156 |
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| container_title | Mathematics and financial economics |
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| creator | Garlappi, Lorenzo Skoulakis, Georgios |
| description | This paper revisits the subject of Taylor series approximations to expected utility and investigates the applicability of the technique to optimal portfolio choice problems. We first provide conditions under which the approximate expected utility of a given portfolio converges to its exact counterpart. We then extend the analysis to the optimal portfolio choice setting and provide conditions on the distribution of asset returns under which the solution to the approximate portfolio choice problem converges to its exact counterpart. Finally, we show that, when asset returns are skewed, one can improve the precision and efficiency of the Taylor expansion by applying a simple nonlinear transformation to asset returns designed to symmetrize the transformed return distribution and shrink its support. |
| doi_str_mv | 10.1007/s11579-011-0051-4 |
| format | Article |
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| fulltext | fulltext |
| identifier | ISSN: 1862-9679 |
| ispartof | Mathematics and financial economics, 2011-09, Vol.5 (2), p.121-156 |
| issn | 1862-9679 1862-9660 |
| language | eng |
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| source | Springer Journals |
| subjects | Applications of Mathematics Approximation Economic models Economic theory Economic Theory/Quantitative Economics/Mathematical Methods Economics Expected utility Finance Insurance Integrals Macroeconomics/Monetary Economics//Financial Economics Management Mathematics Mathematics and Statistics Monte Carlo simulation Quantitative Finance Return on assets Statistics for Business Studies Utility functions |
| title | Taylor series approximations to expected utility and optimal portfolio choice |
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