Probability of Survival as an Investment Criterion

Suppose that an investing firm is primarily interested in achieving a specified minimum return critical to its economic survival. Then it seems appropriate to maximize the probability of exceeding the aspiration level. This decision criterion will be applied in the context of several stochastic static investment models with budget constraint. As long as the aspiration level does not exceed the maximum expected return achievable with the given budget, the desired investment strategy must be sought among the efficient solutions in the Markowitz sense. For higher aspiration levels this is no longer true. For the special case of the Markowitz model we show that all investment projects with expected yield not exceeding the aspiration level (of yield) should be rejected. This is a surprising confirmation of a well-known deterministic rule of investment theory and practice in a rather different context.

• 저널Management Science · 15(1) · 33–48
• 토픽Capital Investment and Risk Analysis · Finance
• DOI10.1287/mnsc.15.1.33
• 저자Fred Hanssmann