Asset Allocation in a Downside Risk Framework

Tien Foo Sing and Seow Eng Ong

Journal of Real Estate Portfolio Management, 2000, vol. 6, issue 3, 213-223

Abstract: Executive Summary. The traditional Markowitz portfolio optimization has two serious drawbacks. First, mean-variance portfolio optimization is inadequate when asset returns are skewed. Second, investor risk aversion is ignored. A more efficient measure of risk that focuses only on the deviation below a pre-specified target rate of return is defined in a generalized lower partial moment (LPM) framework. The concepts of LPM and co-LPM, a downside measure of the covariance of return, are extended to Markowitz's model to provide a more efficient and robust optimization process. This article demonstrates that downside risk models can be easily implemented using spreadsheet programs and illustrates how investor risk aversion can be incorporated into a downside risk asset optimization model.

Date: 2000
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DOI: 10.1080/10835547.2000.12089612

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