Advanced Search
MyIDEAS: Login

Efficient Portfolio Optimization in the Wealth Creation and Maximum Drawdown Space

Contents:

Author Info

  • Alejandro Reveiz

    ()

  • Carlos León

    ()

Abstract

First developed by Markowitz (1952), the mean-variance framework is the most widespread theoretical approximation to the portfolio problem. Nevertheless, successful application in the investment community has been limited. Assumptions such as normality of returns and a static correlation matrix could partially account for this. To overcome some of the limitations of the mean-variance framework, mainly the choice of the risk metric and the inconvenience of using an estimated correlation matrix typical of tranquil or euphoria periods, this paper proposes an alternative risk measure: the maximum drawdown (MDD), and combines it with a wealth creation measure to define a new portfolio optimization space. Like other market practitioners’ measures, MDD lacks of a complete and solid theoretical foundation. In an effort to contribute to its theoretical foundation, this paper uses common sense and financial intuition to introduce such measure, followed by a review of its technical advantages and coherence for risk management. Finally, an application of a MDD risk metric based portfolio optimization model is presented. The main findings indicate this proposal may effectively help overcome some of the traditional mean-variance shortcomings and provide some useful tools for portfolio optimization in practice. For long-term performance driven portfolios, such as pension funds, this approach may yield interesting results because it focuses on wealth creation over the long run.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.banrep.gov.co/docum/ftp/borra520.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Banco de la Republica de Colombia in its series Borradores de Economia with number 520.

as in new window
Length:
Date of creation:
Date of revision:
Handle: RePEc:bdr:borrec:520

Contact details of provider:
Postal: Cra 7 # 14-78 Piso 7
Phone: (57-1) 3431111
Fax: (57-1) 2841686
Email:
Web page: http://www.banrep.org/publicaciones/pub_borra.htm
More information through EDIRC

Related research

Keywords: Portfolio Optimization; Asset Allocation; Downside Risk; Maximum Drawdown; mean-variance Criteria; Diversification. Classification JEL: G11; G23; G32; D81.;

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Alejandro Reveiz & Carlos león & Juan Mario laserna & Ivonne Martínez, . "Recomendaciones para la modificación del régimen de pensiones obligatorias de Colombia," Borradores de Economia 507, Banco de la Republica de Colombia.
  2. Alejandro Revéiz Herault & Sebastian Rojas, . "The case for active management from the perspective of Complexity Theory," Borradores de Economia 495, Banco de la Republica de Colombia.
  3. Enrico De Giorgi, . "A Note on Portfolio Selection under Various Risk Measures," IEW - Working Papers 122, Institute for Empirical Research in Economics - University of Zurich.
  4. Alejandro Reveiz & Carlos León, . "Administración de fondos de pensiones y multifondos en Colombia," Borradores de Economia 506, Banco de la Republica de Colombia.
  5. Philippe Artzner & Freddy Delbaen & Jean-Marc Eber & David Heath, 1999. "Coherent Measures of Risk," Mathematical Finance, Wiley Blackwell, vol. 9(3), pages 203-228.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Gregorio Impavido & Esperanza Lasagabaster & Manuel Garcia-Huitron, 2010. "New Policies for Mandatory Defined Contribution Pensions : Industrial Organization Models and Investment Products," World Bank Publications, The World Bank, number 2462, October.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:bdr:borrec:520. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Camilo Millán).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.