Optimal Portfolio Selection Using the General Multi‐Index Model: A Stable Paretian Framework*

ABSTRACT The problem of selecting optimal portfolios is examined using the general multi‐index model. This model is useful because it allows investors to diversify across different types of assets and thereby exploit or hedge against a wide variety of economic conditions. The analysis is carried out in a stable Paretian framework with and without short sales. As such, it not only encompasses the mean‐variance results for a variety of index models as special cases, but also provides a broad framework for applying the arbitrage pricing theory to portfolio decision making.