OPTIMAL PORTFOLIO SELECTION WITH A SHORTFALL PROBABILITY CONSTRAINT: EVIDENCE FROM ALTERNATIVE DISTRIBUTION FUNCTIONS
<heading id="h1" level="1" implicit="yes" format="display">Abstract</heading>We propose a new approach to optimal portfolio selection in a downside risk framework that allocates assets by maximizing expected return subject to a shortfall probability constraint, reflecting the typical desire of a risk-averse investor to limit the maximum likely loss. Our empirical results indicate that the loss-averse portfolio outperforms the widely used mean-variance approach based on the cumulative cash values, geometric mean returns, and average risk-adjusted returns. We also evaluate the relative performance of the loss-averse portfolio with normal, symmetric thin-tailed, symmetric fat-tailed, and skewed fat-tailed return distributions in terms of average return, risk, and average risk-adjusted return. Copyright (c) 2010 The Southern Finance Association and the Southwestern Finance Association.
Year of publication: |
2010
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Authors: | Akcay, Yalcin ; Yalcin, Atakan |
Published in: |
Journal of Financial Research. - Southern Finance Association - SFA, ISSN 0270-2592. - Vol. 33.2010, 1, p. 77-102
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Publisher: |
Southern Finance Association - SFA Southwestern Finance Association - SWFA |
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