City Research Online

Abstract

Monotone mean–variance (MMV) utility is the minimal modification of the classical Markowitz mean–variance (MV) utility that respects rational ordering of investment opportunities. This paper provides, for the first time, a complete characterization of optimal dynamic portfolio choice for the MMV utility in asset price models with independent returns. The task is performed under minimal assumptions, weaker than the existence of an equivalent martingale measure and with no restrictions on the moments of asset returns. We interpret the maximal MMV utility in terms of the monotone Sharpe ratio (MSR) and show that the global squared MSR arises as the nominal yield from continuously compounding at the rate equal to the maximal local squared MSR. The paper gives simple necessary and sufficient conditions for MV efficient portfolios to be MMV efficient. Several illustrative examples contrasting the MV and MMV criteria are provided.

Publication Type:	Article
Additional Information:	This article will be published in its final form in Mathematics of Operations Research and it will be available online at: pubsonline.informs.org/journal/moor
Publisher Keywords:	local utility, monotone mean-variance efficiency, monotone Sharpe ratio, sigma-special process, variance-optimal separating measure
Subjects:	H Social Sciences > HG Finance
Departments:	Bayes Business School Bayes Business School > Faculty of Finance
SWORD Depositor:	Symplectic Administrator

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