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OPTIMAL PORTFOLIO SELECTION WITH A SHORTFALL PROBABILITY CONSTRAINT: EVIDENCE FROM ALTERNATIVE DISTRIBUTION FUNCTIONS
Author(s) -
Akcay Yalcin,
Yalcin Atakan
Publication year - 2010
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/j.1475-6803.2009.01263.x
Subject(s) - portfolio , downside risk , expected shortfall , econometrics , portfolio optimization , modern portfolio theory , economics , expected return , constraint (computer aided design) , rate of return on a portfolio , selection (genetic algorithm) , mathematics , actuarial science , computer science , financial economics , geometry , artificial intelligence
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.