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Please use this identifier to cite or link to this item: http://bura.brunel.ac.uk/handle/2438/3879

Title: Portfolio selection models: A review and new directions
Authors: Roman, D
Mitra, G
Keywords: Risk measures
Mean-risk
Utility function
Stochastic dominance
Value-at-risk
Conditional value-at-risk
Publication Date: 2009
Publisher: Wilmott Magazine
Citation: Wilmott Journal. 1(2): 69-85
Abstract: Modern Portfolio Theory (MPT) is based upon the classical Markowitz model which uses variance as a risk measure. A generalization of this approach leads to mean-risk models, in which a return distribution is characterized by the expected value of return (desired to be large) and a risk value (desired to be kept small). Portfolio choice is made by solving an optimization problem, in which the portfolio risk is minimized and a desired level of expected return is specified as a constraint. The need to penalize different undesirable aspects of the return distribution led to the proposal of alternative risk measures, notably those penalizing only the downside part (adverse) and not the upside (potential). The downside risk considerations constitute the basis of the Post Modern Portfolio Theory (PMPT). Examples of such risk measures are lower partial moments, Value-at-Risk (VaR) and Conditional Value-at-Risk (CVaR). We revisit these risk measures and the resulting mean-risk models. We discuss alternative models for portfolio selection, their choice criteria and the evolution of MPT to PMPT which incorporates: utility maximization and stochastic dominance.
URI: http://www3.interscience.wiley.com/journal/122389449/abstract?CRETRY=1&SRETRY=0
http://bura.brunel.ac.uk/handle/2438/3879
DOI: http://dx.doi.org/10.1002/wilj.4
ISSN: 1540-6962
Appears in Collections:Mathematics
School of Information Systems, Computing and Mathematics Research Papers

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