An Empirical Analysis of Alternative Portfolio Selection Criteria
AbstractIn modern portfolio theory, financial portfolios are characterised by a desired property, the ‘reward’, and something undesirable, the ‘risk’. While these properties are commonly identified with mean and variance of returns, respectively, we test alternative specifications like partial and conditional moments, quantiles, and drawdowns. More specifically, we analyse the empirical performance of portfolios selected by optimising risk–reward ratios constructed from these alternative functions. We find that these portfolios in many cases outperform our benchmark (minimum-variance), in particular when long-run returns are concerned. However, we also find that all the strategies tested seem quite sensitive to relatively small changes in the data. The main theme throughout our results is that minimising risk, as opposed to maximising reward, often leads to good out-of-sample performance. In contrast, adding a reward-function to the selection criterion improves a given strategy often only marginally.
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Bibliographic InfoPaper provided by Swiss Finance Institute in its series Swiss Finance Institute Research Paper Series with number 09-06.
Length: 41 pages
Date of creation: Mar 2009
Date of revision:
Portfolio optimisation; Optimisation heuristics; Partial moments; Downside risk; Expected Shortfall; Value-at-Risk; Risk measures; Performance measures; Threshold Accepting;
Find related papers by JEL classification:
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
- C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
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- Marianna Lyra, 2010. "Heuristic Strategies in Finance – An Overview," Working Papers 045, COMISEF.
- Manfred Gilli & Enrico Schumann, 2009. "Optimal enough?," Working Papers 010, COMISEF.
- Manfred Gilli & Enrico Schumann, 2009. "Robust regression with optimisation heuristics," Working Papers 011, COMISEF.
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