Optimal Payoff under the Generalized Dual Theory of Choice.

We consider portfolio optimization under a preference model in a single-period, complete market. This preference model includes Yaari's dual theory of choice and quantile maximization as special cases. We characterize when the optimal solution exists and derive the optimal solution in closed form when it exists. The payoff of the optimal portfolio is a digital option: it yields an in-the-money payoff when the market is good and zero payoff otherwise. When the initial wealth increases, the set of good market scenarios remains unchanged while the payoff in these scenarios increases. Finally, we extend our portfolio optimization problem by imposing a dependence structure with a given benchmark payoff and derive similar results.