5THE LIKELIHOOD OF VARIOUS RETURN DISTRIBUTIONS

With Anthony Tessitore, Ansel Tessitore, and Nilufer Usmen1

INTRODUCTION

In prior chapters, it was argued that:

• The maximization of expected utility should be the standard for rational choice among probability distributions in single-period decision situations with known odds (Chapter 1).

• A careful choice from a mean-variance efficient frontier will approximately maximize expected utility for a wide range of concave (risk-averse) utility functions and real-world portfolio return distributions (Chapters 2 and 3).

• Variance is apparently at least as good as any other frequently proposed risk measure in approximately maximizing EU = Elog(1 + return) (Chapter 4).

We conclude from this that mean-variance ...

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