Group for Research in Decision Analysis

Maximizing Investor’s Utility using a Four-Moment Framework

Laurent Bodson HEC Liège, Belgium

Our seminar aims to describe the optimization methodology developed by Gambit Financial Solutions S.A. in order to optimize a portfolio based on the statistical properties of its potential components. We first introduce the traditional optimization framework and constraints used in portfolio management. We present an adjustment of Bell’s utility function to higher moment analysis. We also consider a way to determine the corresponding investor’s profile that integrates the higher moment sensitivities. We express the final optimization system and illustrate some of the features and applications of the model. We conclude emphasizing the different strengths and weaknesses of the proposed method.