Expanding the Merit of Utility Maximisation for Portfolio Choice Bj¨orn Hagstr¨omer, Richard G. Anderson, Jane M. Binner, Thomas Elger, and Birger Nilsson * June 21, 2007 Abstract In the Full-Scale Optimization approach the complete empirical finan- cial return probability distribution is considered, and the utility maximiz- ing solution is found through numerical optimization. Earlier studies have shown that this approach is useful for investors following non-linear util- ity functions (such as bilinear and S-shaped utility) and choosing between highly non-normally distributed assets, such as hedge funds. We clarify the role of (mathematical) smoothness and differentiability of the utility function in the relative performance of FSO among a broad class of utility functions. Using a portfolio choice setting of three common assets (FTSE 100, FTSE 250 and FTSE Emerging Market Index), we identify several utility functions under which Full-Scale Optimization is a substantially better approach than the mean variance approach is. Hence, the robustness of the technique is illustrated with regard to asset type as well as to utility function specification. Keywords: Portfolio choice; Utility maximization; Full-Scale Opti- mization, S-shaped utility, bilinear utility. JEL code: G11 ∗ Bj¨ orn Hagstr¨ omer and Jane M. Binner are from Aston University, UK. Richard G. An- derson is from Federal Reserve Bank of St. Louis. Thomas Elger and Birger Nilsson are from Lund University, Sweden. Correspondence to Bj¨ orn Hagstr¨ omer: hagstrob@aston.ac.uk or Richard G. Anderson: Richard.G.Anderson@stls.frb.org . We are grateful for comments and suggestions by Jim Steeley and Szymon Wlazlowski. 1