Search results for "Modern portfolio theory"
showing 10 items of 22 documents
Superiority of Optimized Portfolios to Naive Diversification: Fact or Fiction?
2017
Abstract DeMiguel, Garlappi, and Uppal (2009) conducted a highly influential study where they demonstrated that none of the optimized portfolios consistently outperformed the naive diversification. This result triggered a heated debate within the academic community on whether portfolio optimization adds value. Nowadays several studies claim to defend the value of portfolio optimization. The commonality in all these studies is that various portfolio optimization methods are implemented using the datasets generously provided by Kenneth French and the performance is measured by means of the Sharpe ratio. This paper aims to provide a cautionary note regarding the use of Kenneth French datasets …
Optimal Dynamic Portfolio Risk Management
2016
Numerous econometric studies report that financial asset volatilities and correlations are time-varying and predictable. Over the past decade, this knowledge has stimulated increasing interest in various dynamic portfolio risk control techniques. The two basic types of risk control techniques are: risk control across assets and risk control over time. At present, the two types of risk control techniques are not implemented simultaneously. There has been surprisingly little theoretical study of optimal dynamic portfolio risk management. In this paper, the author fills this gap in the literature by formulating and solving the multi-period portfolio choice problem. In terms of dynamic portfoli…
Grading investment diversification options in presence of non-historical financial information
2021
Modern portfolio theory deals with the problem of selecting a portfolio of financial assets such that the expected return is maximized for a given level of risk. The forecast of the expected individual assets’ returns and risk is usually based on their historical returns. In this work, we consider a situation in which the investor has non-historical additional information that is used for the forecast of the expected returns. This implies that there is no obvious statistical risk measure any more, and it poses the problem of selecting an adequate set of diversification constraints to mitigate the risk of the selected portfolio without losing the value of the non-statistical information owne…
A fuzzy ranking strategy for portfolio selection applied to the Spanish stock market
2007
In this paper we present a fuzzy ranking procedure for the portfolio selection problem. The uncertainty on the returns of each portfolio is approximated by means of a trapezoidal fuzzy number. The expected return and risk of the portfolio are then characteristics of that fuzzy number. A rank index that accounts for both expected return and risk is defined, allowing the decision-maker to compare different portfolios. The paper ends with an application of that fuzzy ranking strategy to the Spanish stock market.
Scenario optimization asset and liability modelling for individual investors
2006
We develop a scenario optimization model for asset and liability management of individual investors. The individual has a given level of initial wealth and a target goal to be reached within some time horizon. The individual must determine an asset allocation strategy so that the portfolio growth rate will be sufficient to reach the target. A scenario optimization model is formulated which maximizes the upside potential of the portfolio, with limits on the downside risk. Both upside and downside are measured vis- `a-vis the goal. The stochastic behavior of asset returns is captured through bootstrap simulation, and the simulation is embedded in the model to determine the optimal portfolio. …
Cryptocurrency as an Investment Instrument in a Modern Financial Market
2019
This paper considers the development of attractive strategies featuring cryptocurrency assets, considering their costs and potential risks. The object of analysis in this paper is cryptocurren- cy as an investment instrument. The main hypothesis of the research is that modern portfolio theory can be applied to cryptocurrency investments to design an investment portfolio with appropriate risk and profitability characteristics. The authors of the paper: (i) place crypto- currencies in the context of modern financial market and financial technology development; (ii) develop assessment criteria for determining attractiveness of individual cryptocurrencies; and (iii) develop recommendations for …
On the Consistent Use of VaR in Portfolio Performance Evaluation: A Cautionary Note
2010
The portfolio performance measures based on the Value-at-Risk (VaR) concept have gained widespread popularity and are often used in empirical studies. Unfortunately, we have noticed that in majority of empirical studies a VaR-based performance measure is used inconsistently. The goal of this paper is, therefore, to emphasize how to consistently use VaR in portfolio performance evaluation. We also elaborate on a simple framework that allows to derive a general formula for a portfolio performance measure which is not limited to the use of VaR-based reward and risk measures, but is valid for all reward and risk measures that satisfy a few plausible properties.
Radical innovations: Between established knowledge and future research opportunities
2021
Abstract The fast growing body of radical innovation research is fragmented and difficult to overlook. We provide an overview of the most cited journals, authors, and publications and conduct a bibliographic coupling to structure the literature landscape. We identified the following research clusters: management of radical innovations, organizational learning and knowledge, financial aspects of radical innovation, radical innovation adoption and diffusion, radical industry innovations as challenges for incumbents, and radical innovation in specific industries. Based on an in-depth content analysis of these clusters, we identify the following future research opportunities: A systematic compi…
Fuzzy portfolio optimization under downside risk measures
2007
This paper presents two fuzzy portfolio selection models where the objective is to minimize the downside risk constrained by a given expected return. We assume that the rates of returns on securities are approximated as LR-fuzzy numbers of the same shape, and that the expected return and risk are evaluated by interval-valued means. We establish the relationship between those mean-interval definitions for a given fuzzy portfolio by using suitable ordering relations. Finally, we formulate the portfolio selection problem as a linear program when the returns on the assets are of trapezoidal form.
Warren Buffett versus Zvi Bodie: Should You Buy Or Sell Put Options?
2021
Academics and investment professionals often disagree when it comes to investment advice. Legendary investor Warren Buffett is a proponent of time diversification and firmly believes that stocks are less risky in the long run. Therefore, he often sells long-term put options instead of buying them for portfolio protection. By contrast, the famous finance professor Zvi Bodie argues that time diversification is a fallacy and, therefore, his advice to fund managers is to buy long-term portfolio insurance. In this article, we consider the optimal portfolio choice problem for a loss-averse investor. First, we demonstrate that our loss-averse investor subscribes to the principle of time diversific…