The portfolio choice problem: comparison of certainty equivalence and optimal Bayes portfolios |
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Authors: | Stephen J Brown |
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Institution: | Bell Laboratories , Murray Hill, New Jersey |
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Abstract: | For the portfolio problem with unknown parameter values, we compare the conventional certainty equivalence portfolio choice with the optimal Bayes portfolio. In the important single risky asset case a diffuse Bayes rule leads to portfolios that differ significantly from those suggested by a certainty equivalence rule which we show are inadmissible relative to a quadratic utility function for the range of parameters we consider. These results are invariant to arbitrary changes in the utility function parameters. We illustrate the results using a simple mutual fund example. |
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Keywords: | diffuse prior predictive distribution risk function security returns single risky asset |
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