Publication: Optimal portfolio selection with a shortfall probability constraint: evidence from alternative distribution functions
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Abstract
We propose a new approach to optimal portfolio selection in a downside risk framework that allocates assets by maximizing expected return subject to a shortfall probability constraint, reflecting the typical desire of a risk-averse investor to limit the maximum likely loss. Our empirical results indicate that the loss-averse portfolio outperforms the widely used mean-variance approach based on the cumulative cash values, geometric mean returns, and average risk-adjusted returns. We also evaluate the relative performance of the loss-averse portfolio with normal, symmetric thin-tailed, symmetric fat-tailed, and skewed fat-tailed return distributions in terms of average return, risk, and average risk-adjusted return.
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Wiley
Subject
Business administration
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Journal of Financial Research
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DOI
10.1111/j.1475-6803.2009.01263.x