The proper use of risk measures in portfolio theory

Sergio Ortobelli, Svetlozar T. Rachev, Stoyan Stoyanov, Frank J. Fabozzi, Almira Biglova

Research output: Contribution to journalReview article

32 Scopus citations

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.

Original languageEnglish
Pages (from-to)1107-1133
Number of pages27
JournalInternational Journal of Theoretical and Applied Finance
Volume8
Issue number8
DOIs
StatePublished - Dec 2005

Keywords

  • Dispersion measures
  • Fund separation
  • Investors' preference
  • Portfolio selection
  • Risk aversion
  • Safety-risk measures
  • Skewness

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