Please wait a minute...
Frontiers of Economics in China

ISSN 1673-3444

ISSN 1673-3568(Online)

CN 11-5744/F

Postal Subscription Code 80-978

Front. Econ. China    2020, Vol. 15 Issue (1) : 124-139
Orginal Article
A Global-Optimal Portfolio Theory beyond the R-σ Model
Yifan Liu1, Shi-Dong Liang2()
1. School of Physics, and State Key Laboratory of Optoelectronic Material and Technology, Sun Yat-sen University, Guangzhou 510275, China; School of Economics, Fudan University, Shanghai 200433, China
2. School of Physics, and State Key Laboratory of Optoelectronic Material and Technology, Sun Yat-sen University, Guangzhou 510275, China
 Download: PDF(1428 KB)  
 Export: BibTeX | EndNote | Reference Manager | ProCite | RefWorks

Deviations from the efficient market hypothesis allow us to benefit from risk premium in financial markets. We propose a three-pronged (R, σ, H) theory to generalize the (R, σ) model and present the formulation of a three-pronged (R, σ, H) model and its Pareto-optimal solution. We define the local-optimal weights (wR, wσ,wH) that construct the triangle of the quasi-optimal investing subspace and further define the centroid or incenter of the triangle as the optimal investing weights that optimize the mean return, risk premium, and volatility risk. By numerically investigating the Chinese stock market, we demonstrate the validity of this formulation method. The proposed theory provides investors of different styles (conservative or aggressive) an efficient way to design portfolios in financial markets to maximize the mean return while minimizing the volatility risk.

Keywords portfolio      R-σ model      Hurst exponent      risk premium      volatility      Chinese stock market     
Issue Date: 18 April 2020
 Cite this article:   
Yifan Liu,Shi-Dong Liang. A Global-Optimal Portfolio Theory beyond the R-σ Model[J]. Front. Econ. China, 2020, 15(1): 124-139.
[1] Dicle Ozdemir. Interest Rate Volatility Regimes in Selected Asian Countries: A Univariate Markov Switching Analysis[J]. Front. Econ. China, 2020, 15(1): 56-69.
[2] Dongsheng Di, Warren Coats, Yuxuan Zhao. Why Does the World Need a Reserve Asset with a Hard Anchor?[J]. Front. Econ. China, 2017, 12(4): 545-570.
[3] Qin Zhou, Kisalaya Basu, Yan Yuan. Does Health Insurance Coverage Influence Household Financial Portfolios? A Case Study in Urban China[J]. Front. Econ. China, 2017, 12(1): 94-112.
[4] Jian Chen,Chenghu Ma. Option Pricing Based on Alternative Jump Size Distributions[J]. Front. Econ. China, 2016, 11(3): 439-467.
[5] Jiaping Qiu. Precautionary Saving and Health Insurance: A Portfolio Choice Perspective[J]. Front. Econ. China, 2016, 11(2): 232-264.
[6] Keqiang Hou,Luke Chan,Xin Zeng. Information Linkages between Chinese and World Copper Futures Markets[J]. Front. Econ. China, 2015, 10(2): 272-300.
[7] Leo H. Chan. Which Chinese Markets to Diversify into?[J]. Front Econ Chin, 2013, 8(2): 220-232.
[8] Dinghai Xu, Yuying Li. Empirical Evidence of the Leverage Effect in a Stochastic Volatility Model: A Realized Volatility Approach[J]. Front Econ Chin, 2012, 7(1): 22-43.
[9] James Laurenceson. The Impact of Volatility on Growth in China[J]. Front Econ Chin, 2010, 5(4): 527-536.
[10] KONG Dongmin , LIU Hening , WANG Le. Is there a risk-return trade-off? Evidences from Chinese stock markets[J]. Front. Econ. China, 2008, 3(1): 1-14.
Full text