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A Behavioral Explanation of the Asset Allocation Puzzle

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abstract This paper combines a behavioral reward-risk model based on prospect theory with multiple investment accounts to explain the asset allocation puzzle, that is, the observation that investors violate the two-fund separation property of
optimal mean-variance allocations. In a empirical analysis with U.S. data, the authors show that investors with preference according to the behavioral reward-risk model and multiple investment accounts, invest a higher proportion into bonds and large cap stocks as their risk tolerance diminishes, consistently with the empirical findings.
   
type journal paper
   
keywords portfolio selection, asset allocation puzzle, prospect theory, mental accounting
   
project Applying Recent Developments in Computational Statistics to Behavioral Asset Pricing and Portfolio Selection
language English
kind of paper journal article
date of appearance 1-12-2011
journal Investment Management and Financial Innovations
publisher BusinessPerspective (Sumy)
ISSN 1810-4967
ISSN (online) 1812-9358
volume of journal 8
number of issue 4
page(s) 36-44
review double-blind review
   
profile area SEPS - Quantitative Economic Methods
citation De Giorgi, E. (2011). A Behavioral Explanation of the Asset Allocation Puzzle. Investment Management and Financial Innovations, 8(4), 36-44.