Portfolio allocation based on expected profit and loss measures

J. H. Venter and P. J. de Jongh

Journal of Investment Strategies

Abstract: We formulate the portfolio allocation problem from a trading point of view, allowing both long and short positions and taking trading and interest rate costs into account. Expressions are derived for the portfolio profit or loss (PL) that may result over a holding period. The expected profit (EP) and the expected loss (EL) are taken as measures of reward and risk. Optimal portfolios are considered to be allocations that maximize EP subject to EL being below a specified fraction of the EP. Simple expressions are shown for the reward and risk contributions of individual stocks to the portfolio expected PL. This optimal portfolio approach is referred to as the EP–EL method, and it is compared with a method based on maximal expected PL subject to controlled volatility measured by expected absolute PL deviation. The calculations required for these optimal portfolios are formulated as linear programming problems. Extensive results based on the market trading data of 12 stocks are provided to illustrate the properties of the EP–EL method. Among others, this leads to allocations that simultaneously maximize EP and EL while keeping the latter below an acceptable fraction of the former.

References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.risk.net/journal-of-investment-strateg ... it-and-loss-measures (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:rsk:journ6:7826936

Access Statistics for this article

More articles in Journal of Investment Strategies from Journal of Investment Strategies
Bibliographic data for series maintained by Thomas Paine ().