Efficient Skewness/Semivariance Portfolios

Rui Pedro Brito (), Helder Sebastião and Pedro Godinho ()
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Rui Pedro Brito: Faculty of Economics, University of Coimbra, Portugal
Pedro Godinho: Faculty of Economics, University of Coimbra and GEMF, Portugal

No 2015-05, GEMF Working Papers from GEMF, Faculty of Economics, University of Coimbra

Abstract: This paper proposes a new way to measure and deal with risk within the portfolio selection problem using a skewness/semivariance biobjective optimization framework. The solutions of this biobjective optimization problem allow the investor to analyse the efficient trade-off between skewness and semivariance. Due to the endogeneity of the cosemivariance matrix, the biobjective problem is solved using a derivative-free algorithm based on direct multisearch. For four datasets, collected from the Fama/French benchmark collection, the direct multisearch was able to determine the in-sample Pareto frontier. The out-of-sample performance of the skewness/semivariance model was assessed by choosing three portfolios (the portfolio that maximizes a skewness per semivariance ratio, the portfolio that maximizes the Sharpe ratio and the portfolio that maximizes the Sortino ratio) at each in-sample Pareto frontier and measuring their performance in terms of skewness per semivariance ratio, Sharpe ratio, Sortino ratio and turnover. The results show that the efficient skewness/semivariance portfolios are consistently competitive, and often superior, comparatively to the benchmark portfolios considered. Both in-sample and the out-of-sample performance analysis were conducted using three different benchmark returns for the semivariance computations.

Keywords: portfolio selection; semivariance; skewness; multiobjective optimization; derivative-free optimization; direct multisearch. (search for similar items in EconPapers)
JEL-codes: C44 C58 C61 C63 C88 G11 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2015-03
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Related works:
Journal Article: Efficient skewness/semivariance portfolios (2016)
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