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Standardized versus customized portfolio: a compensating variation approach

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Abstract

We consider the investor choice among standardized portfolios, which are based on cash, bond and stock indexes. We present the intertemporal optimization problem with commonly used utility functions. We provide a method to determine the optimal investor’s choice, based on the knowledge of investor’s type (risk aversion and time horizon) and on market performances. For the utility functions envisaged, we compute the losses from not having access to a customized portfolio and show these losses may be severe.

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Authors and Affiliations

  1. Université de Cergy-Pontoise (ThEMA), Cergy-Pontoise, France

    André de Palma & Jean-Luc Prigent

  2. Ecole Polytechnique, Palaiseau, France

    André de Palma

Authors
  1. André de Palma
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  2. Jean-Luc Prigent
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Corresponding author

Correspondence to Jean-Luc Prigent.

Additional information

We would like to acknowledge Andrée Arth and Barbara Wirth (UBS), Moshe Ben-Akiva (MIT), Yurii Nesterov (CORE), Alain Fonck and Yves Wouters (FORTIS), Fidelity Investments, Laura Lindsey (Royal Bank of Canada) as well as from Nicolas Chapon and Nathalie Picard for numerous discussions, comments and suggestions. We also benefitted from the remarks of the participants of the European Investment conference HEC Geneva (2003) and ESEM (2004), especially from Luc Leruth (IMF), Emeric Challier (FORTIS) and Lionel Martellini (University of Southern California) and of the seminar participants at the University of Virginia (Dept. of Economics and School of Business). Finally, the helpful comments and suggestions of Hercules Vladimirou greatly improved this paper.

A. de Palma is senior Member of the Institut Universitaire de France.

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de Palma, A., Prigent, JL. Standardized versus customized portfolio: a compensating variation approach. Ann Oper Res 165, 161–185 (2009). https://doi.org/10.1007/s10479-008-0447-6

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  • DOI: https://doi.org/10.1007/s10479-008-0447-6

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