Different risk measures: different portfolio compositions?

Different risk measures: different portfolio compositions? Traditionally, the measure of risk used in portfolio optimisation models is the variance. However, alternative measures of risk have many theoretical and practical advantages and it is peculiar therefore that they are not used more frequently. This may be because of the difficulty in deciding which measure of risk is best and any attempt to compare different risk measures may be a futile exercise until a common risk measure can be identified. To overcome this, another approach is considered, comparing the portfolio holdings produced by different risk measures, rather than the risk return trade‐off. In this way we can see whether the risk measures used produce asset allocations that are essentially the same or very different. The results indicate that the portfolio compositions produced by different risk measures vary quite markedly from measure to measure. These findings have a practical consequence for the investor or fund manager because they suggest that the choice of model depends very much on the individual's attitude to risk rather than any theoretical and/or practical advantages of one model over another. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Property Investment & Finance Emerald Publishing

Different risk measures: different portfolio compositions?

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Publisher
Emerald Publishing
Copyright
Copyright © 2004 Emerald Group Publishing Limited. All rights reserved.
ISSN
1463-578X
DOI
10.1108/14635780410569489
Publisher site
See Article on Publisher Site

Abstract

Traditionally, the measure of risk used in portfolio optimisation models is the variance. However, alternative measures of risk have many theoretical and practical advantages and it is peculiar therefore that they are not used more frequently. This may be because of the difficulty in deciding which measure of risk is best and any attempt to compare different risk measures may be a futile exercise until a common risk measure can be identified. To overcome this, another approach is considered, comparing the portfolio holdings produced by different risk measures, rather than the risk return trade‐off. In this way we can see whether the risk measures used produce asset allocations that are essentially the same or very different. The results indicate that the portfolio compositions produced by different risk measures vary quite markedly from measure to measure. These findings have a practical consequence for the investor or fund manager because they suggest that the choice of model depends very much on the individual's attitude to risk rather than any theoretical and/or practical advantages of one model over another.

Journal

Journal of Property Investment & FinanceEmerald Publishing

Published: Dec 1, 2004

Keywords: Risk analysis; Modelling; Portfolio investment

References

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