Sustainable Portfolio Optimization with Higher-Order Moments of Risk

Kanwal Iqbal Khan, Syed M. Waqar Azeem Naqvi, Muhammad Mudassar Ghafoor and Rana Shahid Imdad Akash
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Kanwal Iqbal Khan: Institute of Business & Management, University of Engineering and Technology, Lahore 54000, Pakistan
Syed M. Waqar Azeem Naqvi: School of Continuing Studies, McGill University, Montreal, QC H3A3R1, Canada
Muhammad Mudassar Ghafoor: Director, University of the Punjab, Jhelum 49600, Pakistan
Rana Shahid Imdad Akash: School of Business Management, NFC-IEFR, Faisalabad 38000, Pakistan

Sustainability, 2020, vol. 12, issue 5, 1-14

Abstract: Sustainable economic growth and development of stock market plays an important role in diversifying the investment opportunities that can be assessed accordingly. However, a true diversification in portfolio is impossible without inclusion of higher-order moments, skewness and kurtosis. However, the risk-taking behavior of investors is modelled with the help of higher-order moments of risk. Therefore, this study is intended to construct optimal portfolios and efficient frontiers with the inclusion of higher-order moments of risk. The findings show that optimized portfolios with inclusion of skewness and kurtosis are sustainable and significantly different than those from mean-variance optimized portfolios which show asymmetric and fat-tail risk. Results further confirm its significance in balancing the additional risk dimensions and returns in Asian emerging stock markets for sustainable returns. The results also endorse that induction of skewness and kurtosis affects portfolio allocation weights and expected returns. Therefore, this study strongly recommends the inclusion of higher moments of risk for optimization to curtail their effect and sub-optimal decisions.

Keywords: sustainable returns; higher moments; portfolio optimization; skewness; kurtosis; efficient frontiers (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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