Portfolio optimization: The Downside risk framework versus the MeanVariance framework
(2012) NEKP02 20121Department of Economics
 Abstract
 The tradeoff between risk and return is a topic that most investors consider carefully before an investment decision is made. Markowitz’s pioneer work on portfolio selection using the meanvariance framework has entailed a great extent of research in this field. One research is the Sharpe ratio, which is a measure of a financial performance using variance as a risk measure. The shortcoming of variance is that it puts equal weights on positive and negative returns. Investors’ attitudes towards risk are different but in general investors are more concerned about the downside risk rather than the upside risk. This study has thus constructed a new ratio with similar interpretation as for the Sharpe ratio. The new ratio introduced referred to... (More)
 The tradeoff between risk and return is a topic that most investors consider carefully before an investment decision is made. Markowitz’s pioneer work on portfolio selection using the meanvariance framework has entailed a great extent of research in this field. One research is the Sharpe ratio, which is a measure of a financial performance using variance as a risk measure. The shortcoming of variance is that it puts equal weights on positive and negative returns. Investors’ attitudes towards risk are different but in general investors are more concerned about the downside risk rather than the upside risk. This study has thus constructed a new ratio with similar interpretation as for the Sharpe ratio. The new ratio introduced referred to as the downside risk ratio, uses the downside risk measure expected shortfall as the risk measure instead of variance. To find out if there are any differences in asset allocation using different risk measure an actual performance of four stock market indexes will be evaluated using both the Sharpe ratio strategy and the downside risk ratio strategy. Optimal weights for both a portfolio with two indexes (total of six portfolios) and a portfolio containing all the indexes are found. Finally, both strategies the Sharpe ratio and the downside risk ratio will be assessed in terms of whether there are any differences in constructing a portfolio using either a variance or an expected shortfall as a risk measure. (Less)
Please use this url to cite or link to this publication:
http://lup.lub.lu.se/studentpapers/record/2759760
 author
 Sigmundsdóttir, Hulda ^{LU} and Ren, Shubiao ^{LU}
 supervisor

 Hans Byström ^{LU}
 organization
 course
 NEKP02 20121
 year
 2012
 type
 H2  Master's Degree (Two Years)
 subject
 keywords
 Meanvariance framework, expected shortfall, Sharpe ratio, downside risk ratio.
 language
 English
 id
 2759760
 date added to LUP
 20120608 14:58:59
 date last changed
 20120608 14:58:59
@misc{2759760, abstract = {The tradeoff between risk and return is a topic that most investors consider carefully before an investment decision is made. Markowitz’s pioneer work on portfolio selection using the meanvariance framework has entailed a great extent of research in this field. One research is the Sharpe ratio, which is a measure of a financial performance using variance as a risk measure. The shortcoming of variance is that it puts equal weights on positive and negative returns. Investors’ attitudes towards risk are different but in general investors are more concerned about the downside risk rather than the upside risk. This study has thus constructed a new ratio with similar interpretation as for the Sharpe ratio. The new ratio introduced referred to as the downside risk ratio, uses the downside risk measure expected shortfall as the risk measure instead of variance. To find out if there are any differences in asset allocation using different risk measure an actual performance of four stock market indexes will be evaluated using both the Sharpe ratio strategy and the downside risk ratio strategy. Optimal weights for both a portfolio with two indexes (total of six portfolios) and a portfolio containing all the indexes are found. Finally, both strategies the Sharpe ratio and the downside risk ratio will be assessed in terms of whether there are any differences in constructing a portfolio using either a variance or an expected shortfall as a risk measure.}, author = {Sigmundsdóttir, Hulda and Ren, Shubiao}, keyword = {Meanvariance framework,expected shortfall,Sharpe ratio,downside risk ratio.}, language = {eng}, note = {Student Paper}, title = {Portfolio optimization: The Downside risk framework versus the MeanVariance framework}, year = {2012}, }