Paper: arXiv 2512.11666
Authors: Graham L Giller
Abstract
An analytical solution to single-horizon asset allocation for an investor with a piecewise-linear utility function, called herein the “budget threshold utility,” and exogenous position limits is presented. The resulting functional form has a surprisingly simple structure and can be readily interpreted as representing the addition of a simple “risk cost” to otherwise frictionless trading.
Complexity vs Empirical Score
- Math Complexity: 8.0/10
- Empirical Rigor: 2.0/10
- Quadrant: Lab Rats — theoretically deep, empirically untested
Why this score: The paper presents a heavy analytical derivation using advanced mathematical concepts like Gamma functions and generalized error distributions, but lacks empirical validation beyond theoretical discussion and a proposed constant for backtesting.
Research Flowchart
flowchart TD A["Research Goal: Analytical solution for asset allocation<br>with budget threshold utility & position limits"] --> B["Methodology: Mean-Variance Optimization<br>with piecewise-linear utility constraints"] B --> C["Data Inputs: Asset return distributions<br>including leptokurtotic/fat-tailed"] C --> D["Computational Process: Derive first-order conditions<br>and solve for optimal portfolio weights"] D --> E["Key Finding: Simple analytical solution<br>representing risk cost added to frictionless trading"] E --> F["Outcome: Practical framework for<br>risk-limited asset allocation"]
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