The effect of prudence on the optimal allocation in possibilistic and mixed models

TL;DR

This paper investigates how prudence influences optimal investment decisions in models that incorporate fuzzy and probabilistic risks, providing approximate formulas based on risk preferences and fuzzy moments.

Contribution

It introduces approximate formulas for optimal asset allocation in possibilistic and mixed models considering prudence and risk preferences.

Findings

Derived approximate formulas for optimal allocation.

Showed the impact of prudence on investment choices.

Compared possibilistic and mixed models' outcomes.

Abstract

In this paper two portfolio choice models are studied: a purely possibilistic model, in which the return of a risky asset is a fuzzy number, and a mixed model in which a probabilistic background risk is added. For the two models an approximate formula of the optimal allocation is computed, with respect to the possibilistic moments associated with fuzzy numbers and the indicators of the investor risk preferences (risk aversion, prudence).