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An empirical comparison of different risk measures in portfolio optimization

Author

Listed:
  • Lam Weng Hoe

    (School of Mathematical Sciences,Faculty of Science and Technology Universiti Kebangsaan Malaysia, Malaysia.)

  • Jaaman Saiful Hafizah

    (School of Mathematical Sciences,Faculty of Science and Technology Universiti Kebangsaan Malaysia, Malaysia.)

  • Isa Zaidi

    (School of Mathematical Sciences,Faculty of Science and Technology Universiti Kebangsaan Malaysia, Malaysia.)

Abstract

Risk is one of the important parameters in portfolio optimization problem. Since the introduction of the mean-variance model, variance has become the most common risk measure used by practitioners and researchers in portfolio optimization. However, the mean-variance model relies strictly on the assumptions that assets returns are multivariate normally distributed or investors have a quadratic utility function. Many studies have proposed different risk measures to overcome the drawbacks of variance. The purpose of this paper is to discuss and compare the portfolio compositions and performances of four different portfolio optimization models employing different risk measures, specifically the variance, absolute deviation, minimax and semi-variance. Results of this study show that the minimax model outperforms the other models. The minimax model is appropriate for investors who have a strong downside risk aversion.

Suggested Citation

  • Lam Weng Hoe & Jaaman Saiful Hafizah & Isa Zaidi, 2010. "An empirical comparison of different risk measures in portfolio optimization," Business and Economic Horizons (BEH), Prague Development Center, vol. 1(1), pages 39-45, April.
    • Handle: RePEc:pdc:jrnbeh:v:1:y:2010:i:1:p:39-45
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    Citations

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    Cited by:

    1. Marah-Lisanne Thormann & Phan Tu Vuong & Alain B. Zemkoho, 2024. "The Boosted Difference of Convex Functions Algorithm for Value-at-Risk Constrained Portfolio Optimization," Papers 2402.09194, arXiv.org.
    2. Pokharel, Krisha Prasad & Featherstone, Allen M. & Archer, David W., 2019. "Estimating Economic Efficiency Under Risk For Agricultural Cooperatives," International Journal of Food and Agricultural Economics (IJFAEC), Alanya Alaaddin Keykubat University, Department of Economics and Finance, vol. 7(2), April.
    3. Todor Stoilov & Krasimira Stoilova & Miroslav Vladimirov, 2021. "Explicit Value at Risk Goal Function in Bi-Level Portfolio Problem for Financial Sustainability," Sustainability, MDPI, vol. 13(4), pages 1-14, February.

    More about this item

    Keywords

    Portfolio; optimization; risk measures; variance.;
    All these keywords.

    JEL classification:

    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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