Analyzing Investment Portfolios by Distinct Risk Preferences Using Single Index Model
DOI:
https://doi.org/10.54691/bcpbm.v44i.4795Keywords:
Investment portfolios; Risk preference; Single index model; Sharpe ratio.Abstract
At present, many investors perform irrationally in the stock market: they may invest more and short more shares when they lose money in the stock market and be less risky when gaining money. Different risk preference people also perform differently. This study would give investors who have distinct risk preferences investment restrictions so that investors’ returns can be controlled if they invest under certain constraints. This study imports daily data of ten top stock and market index SPX500 and processes these data possible for the Single-Index Model to run. Based on this model, this study keeps original efficient and inefficient frontiers and adds four constraints to find the difference in curves and Sharpe ratio. As a result, this study compares data and curves in the above five situations and suggests risk-averse investors take “no short selling” constraints in their portfolio and risk-seeking investors take the no-constraint portfolio to optimize their profits in the ideal condition. Among four constraints, limiting the weight of each index to less than one is best for risk-seeking investors. Customizing investment portfolios under certain constraints by different risk preference levels using the index model is a good tool for investors to control their risk.
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