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The Proper Use Of Risk Measures In Portfolio Theory

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Author Info

  • SERGIO ORTOBELLI

    (University of Bergamo, Italy)

  • SVETLOZAR T. RACHEV

    (University of California, Santa Barbara and University of Karlsruhe, Germany)

  • STOYAN STOYANOV

    (FinAnalytica Inc., USA)

  • FRANK J. FABOZZI

    ()
    (Yale University, School of Management, 135 Prospect Street, CT 06520-8200, USA)

  • ALMIRA BIGLOVA

    (University of Karlsruhe, Germany)

Abstract

This paper discusses and analyzes risk measure properties in order to understand how a risk measure has to be used to optimize the investor's portfolio choices. In particular, we distinguish between two admissible classes of risk measures proposed in the portfolio literature: safety-risk measures and dispersion measures. We study and describe how the risk could depend on other distributional parameters. Then, we examine and discuss the differences between statistical parametric models and linear fund separation ones. Finally, we propose an empirical comparison among three different portfolio choice models which depend on the mean, on a risk measure, and on a skewness parameter. Thus, we assess and value the impact on the investor's preferences of three different risk measures even considering some derivative assets among the possible choices.

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Bibliographic Info

Article provided by World Scientific Publishing Co. Pte. Ltd. in its journal International Journal of Theoretical and Applied Finance.

Volume (Year): 08 (2005)
Issue (Month): 08 ()
Pages: 1107-1133

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Handle: RePEc:wsi:ijtafx:v:08:y:2005:i:08:p:1107-1133

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Related research

Keywords: Skewness; safety risk measures; risk aversion; dispersion measures; portfolio selection; investors' preference; fund separation;

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Cited by:
  1. Caporin, Massimiliano & Lisi, Francesco, 2011. "Comparing and selecting performance measures using rank correlations," Economics Discussion Papers 2011-14, Kiel Institute for the World Economy.
  2. Ankit Dangi, 2013. "Financial Portfolio Optimization: Computationally guided agents to investigate, analyse and invest!?," Papers 1301.4194, arXiv.org.
  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.
  4. Farinelli, Simone & Ferreira, Manuel & Rossello, Damiano & Thoeny, Markus & Tibiletti, Luisa, 2009. "Optimal asset allocation aid system: From "one-size" vs "tailor-made" performance ratio," European Journal of Operational Research, Elsevier, vol. 192(1), pages 209-215, January.
  5. Ortobelli, Sergio & Rachev, Svetlozar T. & Fabozzi, Frank J., 2010. "Risk management and dynamic portfolio selection with stable Paretian distributions," Journal of Empirical Finance, Elsevier, vol. 17(2), pages 195-211, March.

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