How does the expected utility model contribute to stock selection?
Best insight from top research papers
The expected utility model is used for stock selection in investment decision-making. It is applied as a preselection model for mean-variance portfolio optimization problems, ranking stocks based on their expected utility, entropy, and variance. The model helps in reducing the number of stocks for efficient portfolios, allowing for the construction of portfolios with a lower risk. The EU-EV model has been applied to various stock indices, including the PSI 20, Euro Stoxx 50, and Nasdaq 100, and has shown to be effective in selecting stocks for efficient portfolios. The EU-E model, which combines expected utility and entropy, is also used for stock selection and has been tested on different capital markets to determine if the tradeoff coefficient depends on market development. The model has been found to provide optimal stock selection results for different capital markets.
Answers from top 4 papers
More filters
| Papers (4) | Insight |
|---|---|
26 Jul 2011 2 Citations | The provided paper does not specifically discuss how the expected utility model contributes to stock selection. |
| The expected utility model contributes to stock selection by incorporating both expected utility and Shannon entropy as measures of risk and uncertainty in decision-making. | |
13 Jul 2021 2 Citations | The provided paper does not specifically mention how the expected utility model contributes to stock selection. |
6 Citations | The expected utility model is used in the paper as a preselection model for stock selection, ranking stocks based on their risk. |
Related Questions
Is there a prosocial utility?5 answersProsocial utility refers to the benefits derived from engaging in prosocial behaviors. Research indicates that prosocial helping is crucial for successful social relationships, especially for children with social communication disorders like autism spectrum disorder (ASD). Engaging in acts of kindness can positively impact one's utility over time, with the effect diminishing as more time passes between good deeds. Furthermore, studies suggest that prosocial behaviors can lead to reduced regional finance differentials by fostering transparency and cooperation in financial contracts, ultimately lowering interest and insolvency rates. Overall, evidence supports the notion of prosocial utility, highlighting the importance of prosocial behaviors in enhancing social interactions, well-being, and even financial outcomes.
Utility theory in consumption?5 answersThe utility theory in consumption is a fundamental framework in economic science that studies consumer behavior. However, it has faced criticism and attempts to supplement or improve it. One alternative is to view consumer behavior in the same way as producer behavior, rather than dividing economic agents into consumers and producers. Another approach is the inverse approach to utility theory, where instead of specifying a utility function and deriving actions, the actions of the agent are observed to derive a utility function. This approach has been explored in both deterministic and stochastic settings, revealing that there are infinitely many utility functions generating a given consumption pattern. Additionally, important characteristics of the agent, such as risk attitudes, can be deduced directly from their consumption and investment choices.
How does the concept of Expected Return on Investment influence project selection in various industries?4 answersThe concept of expected return on investment plays a crucial role in project selection across various industries. Proper evaluation of projects' expected risks and returns is essential for optimizing project portfolios and choosing the most appropriate set of projects given limited resources. The combined analysis of portfolios' returns and risks, known as risk-return optimization, is necessary to ensure that a project portfolio with a high expected return does not expose the organization to excessive losses. Different industries have different factors and objectives for project selection, and the evaluation of expected risks and returns must be tailored to the specific characteristics of each industry. In the film industry, for example, expected returns are influenced by the idiosyncratic dollar variance and volatility of a film's payoff, which affects the pricing of idiosyncratic risk. In capital-consuming industries like mining, the determination of expected return on capital takes into account the risk level associated with the specific activities and the high capital consumption involved.
What are the key factors to consider when choosing an IPO model?5 answersWhen choosing an IPO model, it is important to consider several key factors. These factors include the market, size, small size spread factors for value, profit, investment, and momentum, as well as the presence of factor dependencies. Additionally, the costs of IPOs, such as initial underpricing, mandatory disclosures, and substantial fees, should be carefully considered. The pros of an IPO include additional capital raised, a better international reputation, deeper consumer recognition, liquidate benefits for shareholders and investors, greater employee benefits, and higher valuation due to transparency. However, the cons of an IPO include potential underperformance in the long run due to initial underpricing, increased competitive costs for certain industries, and the substantial fees associated with the IPO process.
How does the Expected Utility Theory explain risky decision-making?5 answersExpected Utility Theory (EUT) is a framework for rational decision-making under risky conditions. It uses a utility function to transform a random variable into its certainty equivalent. However, EUT has been criticized for its logical contradictions and inability to explain changeable risk preferences. One paper proposes using the expectation theory, which overcomes the disadvantages of EUT and considers the dual characteristics of expected return and loss in investment decision-making. Another paper presents a quantitative risk analysis methodology based on expected utility, where risks are ranked using expected utility loss and different utility functions can influence the ranking. A third paper reformulates EUT from the perspective of bounded rationality, introducing cognitive bounds and probability grids. Finally, a satisficing model of choice under risk combines EUT with a boundedly rational deliberation process, capturing patterns of behavior that violate standard EUT axioms.
How can we use the Black-Scholes model to make investment decisions?5 answersThe Black-Scholes model is widely used for making investment decisions. It was first proposed in 1973 and has since been modified and praised by financial scholars. The model is used for option pricing and project valuation, and it has applications in pricing intangible assets, risk avoidance, default prediction, and employee stock options. However, the model has limitations due to its ideal assumptions, such as the volatility smile. To address these limitations, suggestions have been made to extend the model with different forms. The Black-Scholes model is considered a viable risk management tool, even in financial markets characterized by stochastic volatilities. Additionally, the model has been used in the context of the COVID-19 recession, where commodity futures exchanges temporarily switched to the Bachelier model.