On the solution uniqueness in portfolio optimization and risk analysis

Abstract

In this paper, we consider the issue of solution uniqueness of the mean-deviation portfolio optimization problem and its inverse for asset returns distributed over a finite number of scenarios. Due to the asymmetry of returns, the risk is assessed by a general deviation measure introduced by Rockafellar et al. [(2006b) Optimality conditions in portfolio analysis with general deviation measures, Mathematical Programming 108, 515–540] instead of the standard deviation as in the classical Markowitz optimization problem. We demonstrate that, in general, one cannot expect the uniqueness of Pareto-optimal profit sharing in cooperative investment and the uniqueness of solutions in the mean-deviation Black–Litterman asset allocation model. For a large class of deviation measures, we provide a resolution of the above nonuniqueness issues based on the principle of law-invariance. We provide several examples illustrating the nonuniqueness and the law-invariant solution.

Locations

• International Journal of Theoretical and Applied Finance - View
• arXiv (Cornell University) - View - PDF