Inverse portfolio problem with coherent risk measures

Bogdan Grechuk and Michael Zabarankin

European Journal of Operational Research, 2016, vol. 249, issue 2, 740-750

Abstract: In general, a portfolio problem minimizes risk (or negative utility) of a portfolio of financial assets with respect to portfolio weights subject to a budget constraint. The inverse portfolio problem then arises when an investor assumes that his/her risk preferences have a numerical representation in the form of a certain class of functionals, e.g. in the form of expected utility, coherent risk measure or mean-deviation functional, and aims to identify such a functional, whose minimization results in a portfolio, e.g. a market index, that he/she is most satisfied with. In this work, the portfolio risk is determined by a coherent risk measure, and the rate of return of investor’s preferred portfolio is assumed to be known. The inverse portfolio problem then recovers investor’s coherent risk measure either through finding a convex set of feasible probability measures (risk envelope) or in the form of either mixed CVaR or negative Yaari’s dual utility. It is solved in single-period and multi-period formulations and is demonstrated in a case study with the FTSE 100 index.

Keywords: Decision making under risk; Coherent risk measure; Portfolio optimization; Inverse portfolio problem (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:249:y:2016:i:2:p:740-750

DOI: 10.1016/j.ejor.2015.09.050

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