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Conditional Value-at-Risk, spectral risk measures and (non-)diversification in portfolio selection problems – A comparison with mean–variance analysis

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  • Brandtner, Mario

Abstract

We study portfolio selection under Conditional Value-at-Risk and, as its natural extension, spectral risk measures, and compare it with traditional mean–variance analysis. Unlike the previous literature that considers an investor’s mean-spectral risk preferences for the choice of optimal portfolios only implicitly, we explicitly model these preferences in the form of a so-called spectral utility function. Within this more general framework, spectral risk measures tend towards corner solutions. If a risk free asset exists, diversification is never optimal. Similarly, without a risk free asset, only limited diversification is obtained. The reason is that spectral risk measures are based on a regulatory concept of diversification that differs fundamentally from the reward-risk tradeoff underlying the mean–variance framework.

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  • Brandtner, Mario, 2013. "Conditional Value-at-Risk, spectral risk measures and (non-)diversification in portfolio selection problems – A comparison with mean–variance analysis," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 5526-5537.
    • Handle: RePEc:eee:jbfina:v:37:y:2013:i:12:p:5526-5537
    DOI: 10.1016/j.jbankfin.2013.02.009
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    More about this item

    Keywords

    Portfolio selection; Spectral risk measures; Conditional Value-at-Risk; Comonotonicity; Efficient frontier; Optimal portfolio;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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