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The 1/N investment strategy is optimal under high model ambiguity

Author

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  • Pflug, Georg Ch.
  • Pichler, Alois
  • Wozabal, David
Abstract
The 1/N investment strategy, i.e. the strategy to split one’s wealth uniformly between the available investment possibilities, recently received plenty of attention in the literature. In this paper, we demonstrate that the uniform investment strategy is rational in situations where an agent is faced with a sufficiently high degree of model uncertainty in the form of ambiguous loss distributions. More specifically, we use a classical risk minimization framework to show that, for a broad class of risk measures, as the uncertainty concerning the probabilistic model increases, the optimal decisions tend to the uniform investment strategy.

Suggested Citation

  • Pflug, Georg Ch. & Pichler, Alois & Wozabal, David, 2012. "The 1/N investment strategy is optimal under high model ambiguity," Journal of Banking & Finance, Elsevier, vol. 36(2), pages 410-417.
    • Handle: RePEc:eee:jbfina:v:36:y:2012:i:2:p:410-417
    DOI: 10.1016/j.jbankfin.2011.07.018
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    More about this item

    Keywords

    Model uncertainty; Risk aware planning; Robust optimization;
    All these keywords.

    JEL classification:

    • C44 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Operations Research; Statistical Decision Theory
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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