Risk and Return Analysis in Multi-Period Utility-Based Portfolio Optimization

Yang Zhu

Abstract

In this thesis, utility functions with a risk and return interpretation are reviewed. The risk and return measures associated with those utility functions are evaluated and compared in terms of rationality, ease of interpretation and stability. While some risk and return measures with appropriate coefficients shows a stable and sensible performance, others display some disturbing properties which may mislead investment decisions. Different utilities’ performances in multi-period portfolio optimization are tested and compared. The utility-based optimized portfolio outperforms the index, and also outperforms the equally weighted portfolio for investors willing to take the higher risk for higher return.