The portfolio choice problem: Comparison of certainty equivalence and optimal bayes portfolios

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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.

Original languageEnglish
Pages (from-to)321-334
Number of pages14
JournalCommunications in Statistics - Simulation and Computation
Volume7
Issue number4
DOIs
Publication statusPublished - 1 Jan 1978
Externally publishedYes

Keywords

  • diffuse prior
  • predictive distribution
  • risk function
  • security returns
  • single risky asset

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