The Portfolio Research Based On Risk Preference

Research on portfolio theory is one of the most burning issues of modern financial theory. The portfolio theory focus on how to invest a certain amount of money on properties under given conditions, it tries to get minimum risk at a given profit or get maximum profit at a given risk. Portfolio theory provides theoretical basis for investment strategic decisions. The raising of the modern portfolio theory makes the transition from qualitative analysis to quantitative analysis in financial-invest theory. That also has caused twice revolution in finance in the end-twentieth century. It always has been leading issues since it was proposed. It has attracted the attention of the scholars all around the world and a lot of research results have came up. But there are some flaws on these researches. Firstly, the most of the portfolio risk measurement is not in accord with the psychology of investors, the model they built is difficult to apply in practice, as a result, the investment effects which guided by these researches leave a lot to be desired. The portfolio theory based on risk preference, however, has important theoretical value and significance of practical guidance. Aim at the discussion above, I proposed an asymmetric risk function based on risk preference. Meanwhile, I built a portfolio model in consideration of a round lot-limit of trading.The paper consists of three parts. In the first part, the complexity of capital market and portfolio theory's current situation and research results are presented. Then, the paper provides an overview of classical portfolio model, together with some brief comment on it. The second part studies on psychology of investors. The psychology was converted to mathematical language with utility function and stochastic dominance method. The consistency between third-order stochastic dominance method and this model has been proved. In the third part of this paper, by relaxing the assumptions of the model, taking a round lot-limit of trading into consideration, the model is improved in this paper. The model solution has been implemented by computer algorithm. Base on the data, empirical research has been done.It concluded that the model based on risk preference acquires better effects than previous models did. As for the innovation of this text, first, by introducing multi-parameter, the model gets more flexible and useful to individual investors have different risking preferences. Besides, it shows that the investment guidelines given by this model are easy and quick to operate, causing dramatic promotion of the efficiency.