Optimized portfolio using a forward-looking expected tail loss

Anthony Sanford

Finance Research Letters, 2022, vol. 46, issue PB

Abstract: In this paper, I construct an optimal portfolio by minimizing the expected tail loss derived from the forward-looking natural distribution of the Recovery Theorem. This natural distribution can be used as the criterion function in an expected tail loss portfolio optimization problem. I find that the portfolio constructed using the Recovery Theorem outperforms both an equally-weighted portfolio and a portfolio constructed using historical expected tail loss. The portfolio constructed using the Recovery Theorem has the smallest historical tail loss, smallest maximum drawdown, highest Sortino Ratio, and highest Sharpe Ratio.

Keywords: Recovery theorem; Portfolio theory; Expected tail loss; Expected shortfall; Portfolio optimization (search for similar items in EconPapers)
JEL-codes: G00 G1 G12 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:46:y:2022:i:pb:s1544612321004104

DOI: 10.1016/j.frl.2021.102421

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