Desirable Properties Of An Ideal Risk Measure In Portfolio Theory
AbstractThis paper examines the properties that a risk measure should satisfy in order to characterize an investor's preferences. In particular, we propose some intuitive and realistic examples that describe several desirable features of an ideal risk measure. This analysis is the first step in understanding how to classify an investor's risk. Risk is an asymmetric, relative, heteroskedastic, multidimensional concept that has to take into account asymptotic behavior of returns, inter-temporal dependence, risk-time aggregation, and the impact of several economic phenomena that could influence an investor's preferences. In order to consider the financial impact of the several aspects of risk, we propose and analyze the relationship between distributional modeling and risk measures. Similar to the notion of ideal probability metric to a given approximation problem, we are in the search for an ideal risk measure or ideal performance ratio for a portfolio selection problem. We then emphasize the parallels between risk measures and probability metrics, underlying the computational advantage and disadvantage of different approaches.
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Bibliographic InfoArticle provided by World Scientific Publishing Co. Pte. Ltd. in its journal International Journal of Theoretical and Applied Finance.
Volume (Year): 11 (2008)
Issue (Month): 01 ()
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Web page: http://www.worldscinet.com/ijtaf/ijtaf.shtml
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- Marco Corazza & Giovanni Fasano & Riccardo Gusso, 2011. "Particle Swarm Optimization with non-smooth penalty reformulation for a complex portfolio selection problem," Working Papers 2011_10, Department of Economics, University of Venice "Ca' Foscari".
- Sergio Ortobelli & Svetlozar Rachev & Haim Shalit & Frank Fabozzi, 2009. "Orderings and Probability Functionals Consistent with Preferences," Applied Mathematical Finance, Taylor and Francis Journals, vol. 16(1), pages 81-102.
- Chen, Zhiping & Wang, Yi, 2008. "Two-sided coherent risk measures and their application in realistic portfolio optimization," Journal of Banking & Finance, Elsevier, vol. 32(12), pages 2667-2673, December.
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