Book contents
- Frontmatter
- Dedication
- Contents
- List of figures
- List of tables
- Acknowledgements
- Part I Our approach in its context
- Part II Dealing with extreme events
- Part III Diversification and subjective views
- Part IV How we deal with exceptional events
- Part V Building Bayesian nets in practice
- Part VI Dealing with normal-times returns
- Part VII Working with the full distribution
- Part VIII A framework for choice
- Part IX Numerical implementation
- Part X Analysis of portfolio allocation
- Appendix I The links with the Black–Litterman approach
- References
- Index
Part VIII - A framework for choice
Published online by Cambridge University Press: 18 December 2013
- Frontmatter
- Dedication
- Contents
- List of figures
- List of tables
- Acknowledgements
- Part I Our approach in its context
- Part II Dealing with extreme events
- Part III Diversification and subjective views
- Part IV How we deal with exceptional events
- Part V Building Bayesian nets in practice
- Part VI Dealing with normal-times returns
- Part VII Working with the full distribution
- Part VIII A framework for choice
- Part IX Numerical implementation
- Part X Analysis of portfolio allocation
- Appendix I The links with the Black–Litterman approach
- References
- Index
Summary
Engaging in an exercise of asset allocation means making choices between future expected consumption and the risks attending to each possible consumption pattern. We all like to consume more; but, for a given level of total consumption, most of us prefer to avoid feast and famine, and to smooth out our consumption pattern.
Implicitly or explicitly we all look at the properties of assets in this light: knowing the expected return from an asset and its ‘risk’ is not enough: we also want to know whether the asset is expected to perform well in hard times; or whether it will generate losses just in those states of the world when the performance of the rest of our portfolio is forcing a diet of bread and thin soup on us.
Making these trade-offs without a clear framework (by ‘ the seat of our pants’, as Markowitz says in the quote reported in the Introduction; see Section 1.2) is very difficult. Utility theory and choice theory provide a logically coherent conceptual crutch in helping us in the task.
We are well aware of the problems with utility theory – indeed, to the extent that these problems are relevant to our project, we devote a substantial portion of this part of the book to their discussion. However, we believe that it is safer to use judiciously a logically coherent optimization programme than to listen to the sirens calls of adhoc allocation recipes.
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- Portfolio Management under StressA Bayesian-Net Approach to Coherent Asset Allocation, pp. 339 - 342Publisher: Cambridge University PressPrint publication year: 2014