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Optimal asset allocation aid system: From "one-size" vs "tailor-made" performance ratio

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Author Info

  • Farinelli, Simone
  • Ferreira, Manuel
  • Rossello, Damiano
  • Thoeny, Markus
  • Tibiletti, Luisa

Abstract

Optimal asset allocation well-fitting investors' goals is a pressing challenge in risk management. Making a step forward to the Sharpe ratio, the parameter-dependent Sortino-Satchell, Generalized Rachev and Farinelli-Tibiletti performance ratios are suggested for personalizing asset allocation. Tailor-made optimal asset paths for five different investor risk profiles are traced over a rolling 12 month investing horizon. Our simulations show a satisfactorily good match between asset allocation and correspondent risk profile. Specifically, Generalized Rachev ratios outperform in personalized allocation for "extreme" risk profiles, i.e. conservative and aggressive investors, whereas Sortino-Satchell and Farinelli-Tibiletti ratios for those that are more moderate. Sharpe ratio confirms its ability in constructing steady-diversified portfolios, although underperformed.

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Bibliographic Info

Article provided by Elsevier in its journal European Journal of Operational Research.

Volume (Year): 192 (2009)
Issue (Month): 1 (January)
Pages: 209-215

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Handle: RePEc:eee:ejores:v:192:y:2009:i:1:p:209-215

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Web page: http://www.elsevier.com/locate/eor

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Keywords: Risk management Decision support system Asset allocation;

References

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  1. Sergio Ortobelli & Svetlozar T. Rachev & Stoyan Stoyanov & Frank J. Fabozzi & Almira Biglova, 2005. "The Proper Use Of Risk Measures In Portfolio Theory," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 8(08), pages 1107-1133.
  2. Farinelli, Simone & Tibiletti, Luisa, 2008. "Sharpe thinking in asset ranking with one-sided measures," European Journal of Operational Research, Elsevier, vol. 185(3), pages 1542-1547, March.
  3. Fishburn, Peter C, 1977. "Mean-Risk Analysis with Risk Associated with Below-Target Returns," American Economic Review, American Economic Association, vol. 67(2), pages 116-26, March.
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Cited by:
  1. Farinelli, Simone & Ferreira, Manuel & Rossello, Damiano & Thoeny, Markus & Tibiletti, Luisa, 2008. "Beyond Sharpe ratio: Optimal asset allocation using different performance ratios," Journal of Banking & Finance, Elsevier, vol. 32(10), pages 2057-2063, October.
  2. Monica Billio & Massimiliano Caporin & Michele Costola, 2012. "Backward/forward optimal combination of performance measures for equity screening," Working Papers 2012_13, Department of Economics, University of Venice "Ca' Foscari".
  3. Schuhmacher, Frank & Eling, Martin, 2012. "A decision-theoretic foundation for reward-to-risk performance measures," Journal of Banking & Finance, Elsevier, vol. 36(7), pages 2077-2082.

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