Opportunity Cost of Constrained Portfolio Strategies: Theory, Method, Evidence

Financial investors frequently confront factors suchas financial regulations that prevent them fromattaining a first-best solution to the optimal assetallocation problem. For example, they may be requiredto implement a mean-variance efficient portfolio, orthey may be constrained to invest in anon-well-diversified choice of assets, such asholding stocks only or bonds only, or they may beconstrained from short-selling. Such constraintsimply the imposition of a welfare loss on theinvestor. That a welfare loss is inevitable is wellknown, but the portfolio choice literature thus farhas offered little guidance on how to measure theloss, and how various factors will influence theamount of the loss. This volume tackles the welfareloss problem in a comprehensive and rigorous manner. Using a combination of mathematical analysis andcomputer simulation, deep insight is achieved into avariety of constrained portfolio choice problems. Thebook will be found highly illuminating to portfoliochoice theorists as well as to students andpractitioners of investment analysis.