Asymmetries and portfolio choice
Magnus Dahlquist & Romeo Tedongap – Stockholm School of Economics and Swedish House of Finance
& Adam Farago – University of Gothenburg
Asset returns have asymmetric distributions and display fatter tails than the normal distribution. Also, investors’ attitudes towards risk show an asymmetric treatment of losses versus gains. Motivated by these facts, we examine the portfolio choice of an investor with generalized disappointment aversion preferences who faces a set of asset returns described by a multivariate extended skew-normal distribution. We demonstrate that taking into account return asymmetries is much more important for disappointment averse investors than for investors with standard preferences.