A statistical analysis of investor preferences for portfolio selection
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A statistical analysis of investor preferences for portfolio selection Doron Nisani1
· Amit Shelef2
Received: 5 January 2019 / Accepted: 19 September 2020 © Springer-Verlag GmbH Germany, part of Springer Nature 2020
Abstract Is the market portfolio consistent with the investors’ preferences for risk and return in the capital markets? The answer to this question is not so simple: on the one hand, the market portfolio (which is derived from a minimization of a coherent risk measurement) is an efficient portfolio in terms of risk and return and therefore should be consistent with the investor’s preference. On the other hand, since none of the current risk indices are considered to be coherent risk measurements, the market portfolio might not be consistent with the investors’ preference. This research attempts to fill this gap by invoking the Lorenz curve ranking method combined with compatible statistical tests, in order to rank the S&P 500 Index and its components in 2014–2017. We conclude that the S&P 500 Index is not considered to be the market portfolio from the investors’ point of view, but rather seen as another asset. In addition, we conclude that the investors exhibit a decreasing risk aversion behavior in ranking financial assets, which suggests that they are willing to take risks for higher rewards. This methodology presents a unique way to empirically examine the theoretical preference relation of von Neumann and Morgenstern. Keywords Investment management · Expected utility model · Stochastic dominance rules · Marginal conditions for stochastic dominance · Lorenz curves JEL Classification D81 · G11 · G32
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Doron Nisani [email protected] Amit Shelef [email protected]
1
School of Business Administration, University of Haifa, 199, Abba Khoushy Ave, Mount Carmel, 3498838 Haifa, Israel
2
Department of Industrial Management, Sapir Academic College, 7916500 D.N. Hof Ashkelon, Israel
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D. Nisani, A. Shelef
1 Introduction Portfolio selection (Markowitz 1952) and the capital asset pricing model (Sharpe 1964; Lintner 1965; Mossin 1966; hereafter CAPM) have become the most common strategy to reduce financial risk in the capital markets and to price financial assets. This method is based on the capital market line—which is the result of diversification of risky assets and a combination with a risk-free asset—and the security market line—which leads to the asset’s pricing according to its sensitivity to the market portfolio. This means that all of the investors in the market must include the market portfolio in their investment strategy. However, is this strategy coherent with the investors’ preference under risk conditions? The theoretical discussion on the issue has concluded that under the risk measurements available in the literature the investor’s preference is not coherent with the portfolio selection results (von Neumann and Morgenstern 1944; Rothschild and Stiglitz 1970; Artzner et al. 1999). However, the empirical discussion on the issue is still ongoing. This research attempts to f
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