Dynamic investment strategies and their risk-return measures

Sergei Esipov () and Igor Vaysburd
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Sergei Esipov: Zurich Financial Services Group, Postal: 1 Liberty Plaza, 165 Broadway, 33rd Floor, http://secure.zurichna.com/centre/centre.nsf/Index.htm
Igor Vaysburd: JP Morgan, Postal: New York, http://www.jpmorgan.com/pages/jpmorgan

Journal of Financial Transformation, 2001, vol. 2, 87-92

Abstract: The two classic objectives of investment are to reduce variability, and to protect the portfolio from shortfalls. There is a profound contradiction between these two objectives. We have shown that the dynamic efficient frontier (DEF) with minimal standard deviation for a given expected profit leads to a contrarian trading strategy. The Black-Jones-Perold constant proportion portfolio insurance (CPPI) corresponds to an opposing strategy. Both DEF and CPPI could be replaced by power options with correspondingly negative and positive powers. These findings provide a motivation to analyze the short-term and long-term implications of popular, static risk-return guidelines for portfolio management, including the efficient frontier, CPPI-controlled downside, Value-at-Risk among others. We find that there is also a contradiction between optimal static short-term and long-term measures for dynamic investments that can be assessed by introducing coupled dynamic risk-return measures, along with a quantitative analysis of various joint profit and loss distributions. This discussion paper represents an extended summary of the results obtained by the authors earlier in Ref 1.

Keywords: Dynamic efficient frontier; asset management (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
Date: 2001
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Persistent link: https://EconPapers.repec.org/RePEc:ris:jofitr:1267

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