Post by Sapphire Capital on Jul 11, 2008 7:33:41 GMT 4
Portfolio Construction with Downside Risk
HARALD LOHRE
Union Investment
THORSTEN NEUMANN
Union Investment
THOMAS WINTERFELDT
HSH Nordbank AG
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May 3, 2008
Abstract:
Portfolio construction seeks an optimal trade-off between a portfolio's mean return and its associated risk. Given that risk may not be properly described by return volatility we examine alternative measures that account for the asymmetric nature of risk. In particular, we optimize portfolios with respect to various measures of downside risk in an empirical out-of-sample setting. These optimizations are successful for most of the investigated measures when assuming perfect foresight of expected returns. While the latter assumption is a strong one we also show that our findings still holdwhen using more naive return estimates. The reductions in downside risk are most convincing for semivariance, semideviation, maximum drawdown and loss penalty while value at risk and measures related to skewness appear rather useless for portfolio construction purposes.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1128803_code694027.pdf?abstractid=1112982&mirid=1
HARALD LOHRE
Union Investment
THORSTEN NEUMANN
Union Investment
THOMAS WINTERFELDT
HSH Nordbank AG
--------------------------------------------------------------------------------
May 3, 2008
Abstract:
Portfolio construction seeks an optimal trade-off between a portfolio's mean return and its associated risk. Given that risk may not be properly described by return volatility we examine alternative measures that account for the asymmetric nature of risk. In particular, we optimize portfolios with respect to various measures of downside risk in an empirical out-of-sample setting. These optimizations are successful for most of the investigated measures when assuming perfect foresight of expected returns. While the latter assumption is a strong one we also show that our findings still holdwhen using more naive return estimates. The reductions in downside risk are most convincing for semivariance, semideviation, maximum drawdown and loss penalty while value at risk and measures related to skewness appear rather useless for portfolio construction purposes.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1128803_code694027.pdf?abstractid=1112982&mirid=1