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Mean-risk models using two risk measures: a multi-objective approach

Author

Listed:
  • Diana Roman
  • Kenneth Darby-Dowman
  • Gautam Mitra

Abstract

This paper proposes a model for portfolio optimization, in which distributions are characterized and compared on the basis of three statistics: the expected value, the variance and the CVaR at a specified confidence level. The problem is multi-objective and transformed into a single objective problem in which variance is minimized while constraints are imposed on the expected value and CVaR. In the case of discrete random variables, the problem is a quadratic program. The mean-variance (mean-CVaR) efficient solutions that are not dominated with respect to CVaR (variance) are particular efficient solutions of the proposed model. In addition, the model has efficient solutions that are discarded by both mean-variance and mean-CVaR models, although they may improve the return distribution. The model is tested on real data drawn from the FTSE 100 index. An analysis of the return distribution of the chosen portfolios is presented.

Suggested Citation

  • Diana Roman & Kenneth Darby-Dowman & Gautam Mitra, 2007. "Mean-risk models using two risk measures: a multi-objective approach," Quantitative Finance, Taylor & Francis Journals, vol. 7(4), pages 443-458.
    • Handle: RePEc:taf:quantf:v:7:y:2007:i:4:p:443-458
    DOI: 10.1080/14697680701448456
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