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Optimized portfolio using a forward-looking expected tail loss

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  • Sanford, Anthony

Abstract

In this paper, I construct an optimal portfolio by minimizing the expected tail loss derived from the forward-looking natural distribution of the Recovery Theorem. This natural distribution can be used as the criterion function in an expected tail loss portfolio optimization problem. I find that the portfolio constructed using the Recovery Theorem outperforms both an equally-weighted portfolio and a portfolio constructed using historical expected tail loss. The portfolio constructed using the Recovery Theorem has the smallest historical tail loss, smallest maximum drawdown, highest Sortino Ratio, and highest Sharpe Ratio.

Suggested Citation

  • Sanford, Anthony, 2022. "Optimized portfolio using a forward-looking expected tail loss," Finance Research Letters, Elsevier, vol. 46(PB).
    • Handle: RePEc:eee:finlet:v:46:y:2022:i:pb:s1544612321004104
    DOI: 10.1016/j.frl.2021.102421
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    References listed on IDEAS

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    More about this item

    Keywords

    Recovery theorem; Portfolio theory; Expected tail loss; Expected shortfall; Portfolio optimization;
    All these keywords.

    JEL classification:

    • G00 - Financial Economics - - General - - - General
    • G1 - Financial Economics - - General Financial Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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