Reliability-based portfolio optimization with conditional value at risk (CVaR)

Raghu Nandan Sengupta and Siddharth Sahoo

Quantitative Finance, 2013, vol. 13, issue 10, 1637-1651

Abstract: This paper builds on the work of Roman et al . [ Quant. Finance , 2007, 7 , 443--458], whereby we incorporate the concept of the reliability-based design optimization (RBDO) technique. We reformulate Roman et al .'s model by including both non-deterministic design variables as well as probabilistic parameter values of returns of assets, and solve it with a relevant probabilistic constraint. Apart from a similar set of conclusions as derived by Roman et al ., we deduce a few other interesting observations, some of which are: (i) reliability forces diversification and hence reduces portfolio risk; (ii) an increase in the level of reliability aids in better portfolio management, as it aids diversification; and (iii) a decrease in the investor's attitude with respect to how reliable the input data is, has an adverse effect on the optimal value of the portfolio risk/variance.

Date: 2013
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Citations: View citations in EconPapers (3)

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DOI: 10.1080/14697688.2012.754547

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