On a Model of Portfolio Selection with Benchmark

Posted: 23 Jul 2002

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Abstract

Evidently, the theoretical foundation of behavioral portfolio selection fundamentally differs from the concept of rational portfolio selection under uncertainty. Behavioral portfolio selection with respect to some given benchmark portfolio violates classical axioms of rationality. The paper proposes a unified behavioral model of portfolio selection, which incorporates both, rational portfolio selection as well as benchmarking, and derives its analytical solution. In the model, the manager's utility function is based on regret theory and has two instead of one objective variable. The corresponding EVC-criterion helps to clarify controversial issues in portfolio selection and allows for testable implications.

Keywords: portfolio selection, multiattribute utility, regret, benchmark portfolio, index tracking

JEL Classification: G11

Suggested Citation

Wagner, Niklas F., On a Model of Portfolio Selection with Benchmark. Journal of Asset Management, Vol. 3, No. 1, pp. 55-65, 2005, Available at SSRN: https://ssrn.com/abstract=319980

Niklas F. Wagner (Contact Author)

Passau University ( email )

Innstrasse 27
Passau, 94030
Germany

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