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Journal articles (2017), Review of Financial Studies, 30 (2), pp. 667-702

Asymmetries and Portfolio Choice


We examine the portfolio choice of an investor with generalized disappointment-aversion preferences who faces log returns described by a normal-exponential model. We derive a three-fund separation strategy: the investor allocates wealth to a risk-free asset, a standard mean-variance efficient fund, and an additional fund reflecting return asymmetries. The optimal portfolio is characterized by the investor’s endogenous effective risk aversion and implicit asymmetry aversion. In empirical applications, we find that disappointment aversion is associated with much larger asymmetry aversion than are standard preferences. Our model explains patterns in popular portfolio advice across both risk appetites and investment horizons. Link to the article

DAHLQUIST, M., FARAGO, A. and TÉDONGAP, R. (2017). Asymmetries and Portfolio Choice. Review of Financial Studies, 30(2), pp. 667-702.