Leverage Aversion, Efficient Frontiers, and the Efficient Region

摘要

This article proposes to augment portfolio theory and mean-variance optimization to incorporate investors' aversion to leverage. The authors suggest a specification for leverage aversion that captures the unique risks of leverage. They also introduce mean-variance leverage-efficient frontiers, compare them with conventional mean-variance-efficient frontiers, and develop a mean-variance leverage-efficient region. Their analysis shows that leverage aversion can have a large effect on an investor's portfolio choice.