Revealed preferences for portfolio selection – does skewness matter?

ABSTRACT

In this article, we consider the portfolio selection problem as a Bayesian decision problem. We compare the traditional mean–variance and mean–variance–skewness efficient portfolios. We develop bi-level programming problem to investigate the market’s preference for risk by using observed (market) weights. Numerical experiments are conducted on a portfolio formed by the 30 stocks in the Dow Jones Industrial Average. Numerical results show that the market’s preferences are better explained when skewness is included.

KEYWORDS:

• Revealed preferences
• mean–variance classical portfolio
• mean–variance–skewness optimal portfolio

JEL CLASSIFICATION:

• C11
• C61
• C63
• G11

Disclosure statement

No potential conflict of interest was reported by the authors.