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The aim of this paper is to study the optimal investment problem by using coherent acceptability indices (CAIs) as a tool to measure the portfolio performance. We call this problem the acceptability maximization. First, we study the one-period (static) case, and propose a numerical algorithm that approximates the original problem by a sequence of risk minimization problems. The results are applied to several important CAIs, such as the gain-to-loss ratio, the risk-adjusted return on capital and the tail-value-at-risk based CAI. In the second part of the paper we investigate the acceptability maximization in a discrete time dynamic setup. Using robust representations of CAIs in terms of a family of dynamic coherent risk measures (DCRMs), we establish an intriguing dichotomy: if the corresponding family of DCRMs is recursive (i.e. strongly time consistent) and assuming some recursive structure of the market model, then the acceptability maximization problem reduces to just a one period problem and the maximal acceptability is constant across all states and times. On the other hand, if the family of DCRMs is not recursive, which is often the case, then the acceptability maximization problem ordinarily is a time-inconsistent stochastic control problem, similar to the classical mean-variance criteria. To overcome this form of time-inconsistency, we adapt to our setup the set-valued Bellman's principle recently proposed in [
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Figure 2. Efficient frontiers for returns over time. The mean-risk profiles and the corresponding values of dRAROC are depicted for three trading strategies: the time consistent mean-risk strategy in one state $ \omega $ (yellow triangle), the switching strategy (red diamond) and the myopic strategy (magenta square). The element of the frontier with the highest dRAROC is also depicted at each time (green circle)
Table Algorithm 1. Approximating maximal acceptability α* via risk minimization
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Table 1. Algorithm 1 for AIT, GLR and RAROC in a toy market model
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Panel A: Return matrix R in the toy market model (two assets and four states of the world). | ||||||||||||||||
AIT | GLR | RAROC | ||||||||||||||
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Panel B: Iterations of Algorithm 1 with input parameters |
Table 2.
Iterations of the modified, the mixed and the zero-level version of Algorithm 1 for
Modified algorithm for GLR | Mixed algorithm for GLR | Zero-level algorithm for GLR | |||||||||||||||||
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Table 3.
The behavior of Algorithm 1 for various input parameters in a market model with
Panel A: |
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Step 1 | Step 2 | Run time | |||||
Iter | Iter | (s) | |||||
5 | 18 | 6.1e-05 | 3.78 | ||||
2 | 18 | 7.6e-05 | 3.40 | ||||
4 | 18 | 9.5e-05 | 3.56 | ||||
5 | 31 | 7.5e-09 | 6.22 | ||||
15 | no Step 2 | 1.88 | |||||
17 | 18 | 6.1e-05 | 4.67 | ||||
15 | no Step 2 | 4.61 | |||||
16 | 18 | 6.1e-05 | 7.15 | ||||
Panel B: |
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Step 1 | Step 2 | Run time | |||||
Iter | Iter | (s) | |||||
9 | 22 | 6.1e-05 | 21.53 | ||||
5 | 21 | 7.6e-05 | 17.27 | ||||
2 | 21 | 9.5e-05 | 15.74 | ||||
9 | 35 | 7.5e-09 | 30.40 | ||||
15 | no Step 2 | 6.50 | |||||
18 | 22 | 6.1e-05 | 23.91 | ||||
15 | no Step 2 | 13.41 | |||||
20 | 22 | 6.1e-05 | 30.27 | ||||
Panel C: |
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Step 1 | Step 2 | Run time | |||||
Iter | Iter | (s) | |||||
2 | 15 | 6.1e-05 | 7.20 | ||||
4 | 15 | 7.6e-05 | 9.41 | ||||
8 | 14 | 9.4e-05 | 12.84 | ||||
2 | 28 | 7.5e-09 | 11.07 | ||||
15 | no Step 2 | 10.55 | |||||
20 | 15 | 6.1e-05 | 19.59 | ||||
15 | no Step 2 | 7.04 | |||||
18 | 15 | 6.1e-05 | 13.41 |
Table 4.
A comparison of the different versions of the algorithm in a market with
Panel A: |
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lgorithm | Step 1 | Bisection on |
Bisection on |
Run time | |||||
Iter | Iter | Iter | (s) | ||||||
Original | 5 | 18 | 6.1e-05 | 3.32 | |||||
Modified | 2 | 23 | 8.3e-05 | 3.67 | |||||
Mixed | 2 | 5 | 18 | 6.1e-05 | 3.90 | ||||
Zero level | 3 | 18 | 5.9e-05 | 2.96 | |||||
Original | 5 | 18 | 6.1e-05 | 4.89 | |||||
Modified | 2 | 23 | 8.5e-05 | 5.11 | |||||
Mixed | 2 | 5 | 18 | 6.1e-05 | 5.09 | ||||
Zero level | 3 | 18 | 5.1e-05 | 4.36 | |||||
Panel B: |
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Algorithm | Step 1 | Bisection on |
Bisection on |
Run time | |||||
Iter | Iter | Iter | (s) | ||||||
Original | 9 | 22 | 6.1e-05 | 19.45 | |||||
Modified | 2 | 29 | 7.4e-05 | 18.42 | |||||
Mixed | 2 | 8 | 22 | 6.1e-05 | 19.75 | ||||
Zero level | 3 | 22 | 6.7e-05 | 14.54 | |||||
Original | 9 | 22 | 6.1e-05 | 39.56 | |||||
Modified | 2 | 29 | 7.9e-05 | 40.85 | |||||
Mixed | 2 | 8 | 22 | 6.1e-05 | 41.66 | ||||
Zero level | 3 | 22 | 6.8e-05 | 32.17 | |||||
Panel C: |
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Algorithm | Step 1 | Bisection on |
Bisection on |
Run time | |||||
Iter | Iter | Iter | (s) | ||||||
Original | 2 | 15 | 6.1e-05 | 5.88 | |||||
Modified | 2 | 18 | 6.0e-05 | 5.88 | |||||
Mixed | 2 | 2 | 15 | 6.1e-05 | 5.62 | ||||
Zero level | 2 | 15 | 9.1e-05 | 5.53 | |||||
Original | 2 | 15 | 6.1e-05 | 6.91 | |||||
Modified | 2 | 18 | 6.3e-05 | 8.00 | |||||
Mixed | 2 | 3 | 18 | 6.1e-05 | 8.12 | ||||
Zero level | 2 | 15 | 9.4e-05 | 7.04 |
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Efficient frontiers (black) of the mean-risk problems and elements with the highest mean-to-risk ratio (green). All frontiers are depicted in the
Efficient frontiers for returns over time. The mean-risk profiles and the corresponding values of dRAROC are depicted for three trading strategies: the time consistent mean-risk strategy in one state
Efficient frontiers (black) of the problems (17) depicted for wealth