How Higher Moments Affect the Allocation of Assets
Eric Jondeau and Michael Rockinger*
Finance Letters, 2003, 1(2).
Abstract
We evaluate how deviations from normality may affect the allocation of assets. A Taylor expansion of expected utility allows us to focus on certain moments and to compute numerically the optimal portfolio allocation. We obtain that for small values of the risk-aversion parameter, non-normality does not alter significantly the optimal allocation. In contrast, when the investor is strongly risk averse, and restricted to invest in risky assets only, we also obtain significant changes in portfolio weights.
Keywords: Asset allocation, Stock returns, Non-normality, Utility function.
JEL classification: C22, C51, G12.
* HEC Lausanne