Mean-Risk Analysis with Risk Associated with Below-Target Returns

Abstract

This report examines a class of mean-risk dominance models for investment and capital budgeting situations in which risk is associated with returns that fall below a specified target return. The model is offered as a partial reconciliation among viewpoints that have been associated with a large number of different models for choice in risky decision situations, including various parametric models, expected utility models, and stochastic dominance models. It is argued that the specific type of model examined has promising computational possibilities, and that it has a fair degree of compatibility with expected utility, stochastic dominance, and with the primary concerns expressed by decision makers in investment situations.