Taking Market Risk into Account in Portfolio Optimization

We provide an economic interpretation of the practice consisting in incorporating risk measures as constraints in portfolio optimization problem. For what we call the infimum of expectations class of risk measures, we show that if the decision maker maximizes the expectation of a random return under constraint that the risk measure is bounded above, he then behaves as a "generalized expected utility maximizer". As an application, we make the link between a portfolio maximization problem, subject to Conditional Value-at-Risk being less than a threshold value, and a non-expected utility formulation involving "loss aversion"-type utility functions.