Portfolio Construction by Using Different Risk Models: A Comparison among Diverse Economic Scenarios

Ahmed Hunjra (), Suha Mahmoud Alawi, Sisira Colombage, Uroosa Sahito and Mahnoor Hanif
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Suha Mahmoud Alawi: Department of Finance, Faculty of Economics and Administration, King Abdulaziz University, Jeddah 22322, Saudi Arabia
Sisira Colombage: Federation Business School, Federation University Australia, Clyde Road, Berwick, VIC 3806, Australia
Uroosa Sahito: Department of Business Administration, University of Sufism and Modern Sciences Bhitshah, Sindh 70140, Pakistan
Mahnoor Hanif: University Institute of Management Sciences-PMAS—Arid Agriculture University Rawalpindi, Rawalpindi, Punjab 46000, Pakistan

Risks, 2020, vol. 8, issue 4, 1-23

Abstract: We aim to construct portfolios by employing different risk models and compare their performance in order to understand their appropriateness for effective portfolio management for investors. Mean variance (MV), semi variance (SV), mean absolute deviation (MaD) and conditional value at risk (CVaR) are considered as risk measures. The price data were extracted from the Pakistan stock exchange, Bombay stock exchange and Dhaka stock exchange under diverse economic conditions such as crisis, recovery and growth. We take the average of GDP of the selected period of each country as a cut-off point to make three economic scenarios. We use 40 stocks from the Pakistan stock exchange, 92 stocks from the Bombay stock exchange and 30 stocks from the Dhaka stock exchange. We compute optimal weights using global minimum variance portfolio (GMVP) for all stocks to construct optimal portfolios and analyze the data by using MV, SV, MaD and CVaR models for each subperiod. We find that CVaR (95%) gives better results in each scenario for all three countries and performance of portfolios is inconsistent in different scenarios.

Keywords: mean variance; semi variance; mean absolute deviations; conditional value at risk; stock market; portfolio construction (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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