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The Proper Use Of Risk Measures In Portfolio Theory


    (University of Bergamo, Italy)


    (University of California, Santa Barbara and University of Karlsruhe, Germany)


    (FinAnalytica Inc., USA)



    (Yale University, School of Management, 135 Prospect Street, CT 06520-8200, USA)


    (University of Karlsruhe, Germany)

This paper discusses and analyzes risk measure properties in order to understand how a risk measure has to be used to optimize the investor's portfolio choices. In particular, we distinguish between two admissible classes of risk measures proposed in the portfolio literature: safety-risk measures and dispersion measures. We study and describe how the risk could depend on other distributional parameters. Then, we examine and discuss the differences between statistical parametric models and linear fund separation ones. Finally, we propose an empirical comparison among three different portfolio choice models which depend on the mean, on a risk measure, and on a skewness parameter. Thus, we assess and value the impact on the investor's preferences of three different risk measures even considering some derivative assets among the possible choices.

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Article provided by World Scientific Publishing Co. Pte. Ltd. in its journal International Journal of Theoretical and Applied Finance.

Volume (Year): 08 (2005)
Issue (Month): 08 ()
Pages: 1107-1133

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Handle: RePEc:wsi:ijtafx:v:08:y:2005:i:08:p:1107-1133
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