PORTFOLIO OPTIMIZATION WITH DRAWDOWN CONSTRAINTS

A. Chekhlov, S. Uryasev and M. Zabarankin
Additional contact information
A. Chekhlov: TrendLogic Associates, Inc., One Fawcett Place, Greenwich, Ct 06830, USA
S. Uryasev: University of Florida, ISE, P.O. Box 116595, 303 Weil Hall Gainesville, FL 32611-6595, USA
M. Zabarankin: University of Florida, ISE, P.O. Box 116595, 303 Weil Hall Gainesville, FL 32611-6595, USA

Chapter 13 in Supply Chain and Finance, 2004, pp 209-228 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractWe propose a new one-parameter family of risk measures, which is called Conditional Draw-down-at-Risk (CDaR). These measures of risk are functionals of the portfolio drawdown (underwater) curve considered in an active portfolio management. For some value of the tolerance parameter β, the CDaR is defined as the mean of the worst (1 - β) * 100% drawdowns. The CDaR risk measure includes the Maximal Drawdown and Average Drawdown as its limiting cases. For a particular example, we find the optimal portfolios for a case of Maximal Drawdown, a case of Average Drawdown, and several intermediate cases between these two. The CDaR family of risk measures is similar to Conditional Value-at-Risk (CVaR), which is also called Mean Shortfall, Mean Access loss, or Tail Value-at-Risk. Some recommendations on how to select the optimal risk measure for getting practically stable portfolios are provided. We solved a real life portfolio allocation problem using the proposed measures.

Keywords: Finance; Supply Chain; E-Commerce; Optimization; Mathematical Modeling; Operations Research (search for similar items in EconPapers)
Date: 2004
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Citations: View citations in EconPapers (10)

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