Risk and spectral instability in portfolio analysis
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This study extends the traditional E-V portfolio selection model pioneered by Markowitz and extended by others to accommodate the investor's attitude towards predicted instability. It is argued that investors-given the choice between the two equal amplitude net earnings series-may either prefer, or be averse to, investing in that stock with the highest frequency, all other things constant. An instability aversion (preference) function was developed in this study that could accomodate alternative attitudes toward instability. Finally, a situation where an investor (who is assumed to be averse to predicted instability) was given the choice of selecting among alternative combinations of six stocks, was analyzed under alternative weights assigned to the importance of instability relative to risk. The results showed that the optimal portfolio combination may begin to differ sharply from the traditional E-V solution as the investor's aversion toward instability becomes more important relative to his aversion to risk. © 1983.
author list (cited authors)
Talpaz, H., Harpaz, A., & Penson, J. B.