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Portfolio Construction with Postmodern Portfolio Theory Framework

Author

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  • Erdi BAYRAM
  • Rabia AKTAŞ

Abstract

This study includes alternative portfolio construction approaches consistent with the Modern Portfolio Theory (MPT) and Postmodern Portfolio Theory (PMPT). We propose a weighting strategy based on Sharpe and Sortino optimization, and unlike MPT, we create PMPT portfolios using downside metrics, such as downside risk, downside beta, and downside capital asset pricing model (D-CAPM). Portfolios consist of stocks in the Borsa Istanbul Participation 30 Index (XK030), with the stocks in the portfolio having been revised according to screening periods. In addition, we created an equally weighted portfolio and used XK030 as a benchmark for comparative analysis. The sample period covers 527 trading days between May 6, 2022, and June 28, 2024. The results show that the Sharpe portfolio consistently follows the benchmark index throughout the observation period. Sortino outperforms both the benchmark and conventional market index in some specific periods when the market has an upward trend, especially. This study provides evidence that the MPT and PMPT approaches and measures can be used in asset allocation and portfolio management. Investors can manage their assets and balance portfolio weights by implementing the models in different market conditions.

Suggested Citation

  • Erdi BAYRAM & Rabia AKTAŞ, 2025. "Portfolio Construction with Postmodern Portfolio Theory Framework," Journal of Research in Economics, Politics & Finance, Ersan ERSOY, vol. 10(1), pages 27-43.
    • Handle: RePEc:ahs:journl:v:10:y:2025:i:1:p:27-43
    DOI: https://doi.org/10.30784/epfad.1576857
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    More about this item

    Keywords

    Postmodern Portfolio Theory; Downside Risk; Portfolio Optimization; Participation Index;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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