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Optimal Portfolio Selection With A Shortfall Probability Constraint: Evidence From Alternative Distribution Functions

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  • Yalcin Akcay
  • Atakan Yalcin

Abstract

Abstract We propose a new approach to optimal portfolio selection in a downside risk framework that allocates assets by maximizing expected return subject to a shortfall probability constraint, reflecting the typical desire of a risk-averse investor to limit the maximum likely loss. Our empirical results indicate that the loss-averse portfolio outperforms the widely used mean-variance approach based on the cumulative cash values, geometric mean returns, and average risk-adjusted returns. We also evaluate the relative performance of the loss-averse portfolio with normal, symmetric thin-tailed, symmetric fat-tailed, and skewed fat-tailed return distributions in terms of average return, risk, and average risk-adjusted return. Copyright (c) 2010 The Southern Finance Association and the Southwestern Finance Association.

Suggested Citation

  • Yalcin Akcay & Atakan Yalcin, 2010. "Optimal Portfolio Selection With A Shortfall Probability Constraint: Evidence From Alternative Distribution Functions," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 33(1), pages 77-102.
  • Handle: RePEc:bla:jfnres:v:33:y:2010:i:1:p:77-102
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    1. repec:spr:opsear:v:54:y:2017:i:3:d:10.1007_s12597-016-0289-y is not listed on IDEAS
    2. Houda Hafsa, 2015. "CVaR in Portfolio Optimization: An Essay on the French Market," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 6(2), pages 101-111, April.

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