THE PROPER USE OF RISK MEASURES IN PORTFOLIO THEORY

Sergio Ortobelli, Svetlozar T. Rachev, Stoyan Stoyanov, Frank Fabozzi () and Almira Biglova
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Sergio Ortobelli: University of Bergamo, Italy
Svetlozar T. Rachev: University of California, Santa Barbara and University of Karlsruhe, Germany
Stoyan Stoyanov: FinAnalytica Inc., USA
Almira Biglova: University of Karlsruhe, Germany

International Journal of Theoretical and Applied Finance (IJTAF), 2005, vol. 08, issue 08, 1107-1133

Abstract: This paper discusses and analyzes risk measure properties in order to understand how a risk measure has to be used to optimize the investor's portfolio choices. In particular, we distinguish between two admissible classes of risk measures proposed in the portfolio literature: safety-risk measures and dispersion measures. We study and describe how the risk could depend on other distributional parameters. Then, we examine and discuss the differences between statistical parametric models and linear fund separation ones. Finally, we propose an empirical comparison among three different portfolio choice models which depend on the mean, on a risk measure, and on a skewness parameter. Thus, we assess and value the impact on the investor's preferences of three different risk measures even considering some derivative assets among the possible choices.

Keywords: Skewness; safety risk measures; risk aversion; dispersion measures; portfolio selection; investors' preference; fund separation (search for similar items in EconPapers)
Date: 2005
References: View complete reference list from CitEc
Citations: View citations in EconPapers (21)

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DOI: 10.1142/S0219024905003402

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