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Asymmetries and Portfolio Choice

Journal article
Authors Magnus Dahlquist
Adam Farago
Roméo Tédongap
Published in The Review of financial studies
Volume 30
Issue 2
Pages 667-702
ISSN 0893-9454
Publication year 2017
Published at Centre for Finance
Department of Economics
Pages 667-702
Language en
Subject categories Economics


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.

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