Open AccessUpside and downside beta portfolio construction: A different approach to risk measurement and portfolio construction
Author(s) -
Austin Guy
Publication year - 2015
Publication title -
risk governance and control: financial markets and institutions
Language(s) - English
Resource type - Journals
eISSN - 2077-4303
pISSN - 2077-429X
DOI - 10.22495/rgcv5i4c1art13
Subject(s) - downside risk , portfolio , beta (programming language) , econometrics , metric (unit) , modern portfolio theory , portfolio optimization , economics , systematic risk , actuarial science , computer science , financial economics , operations management , programming language
Traditional financial measurements of risk are limited to variance-based methodologies. The most common measurement tool is beta. The beta calculation, however, is directionally agnostic and relies on the assumption of a normal distribution. This is a poor metric by which risk is measured, and is incomplete. The ability to break down beta into Upside and Downside beta allows investors the ability to more intelligently build risk into a portfolio. Using three-year trailing betas may also allow investors the ability to benefit from mean reversion and generate excess returns on a risk-adjusted basis