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On the optimization of a CAPM portfolio using lower partial moments as measure of risk and using the possibility of safeguarding its loss

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  • Spreitzer, U.W.
  • Reznik, V.

Abstract

Using a portfolio built from bonds (investment without volatility) and shares (investment with volatility) corresponding to the CAPM we calculate the possible loss of this portfolio. The loss is measured by a so-called lower partial moment of the rate of return of the portfolio. Using this loss, we optimize the composition of the portfolio with respect to this loss. Also we investigate the optimization of the portfolio when the loss can be underwritten by an insurance. Concerning the premium of this insurance contract, we show that when the premium is defined inadequate, e.g. proportional to the investment or proportional to the amount of investment in shares, the optimal portfolio consists only of investment in shares. When the premium is defined more suitable, e.g. proportional to the loss, the optimal portfolio is built by an investment in bonds and shares.

Suggested Citation

  • Spreitzer, U.W. & Reznik, V., 2007. "On the optimization of a CAPM portfolio using lower partial moments as measure of risk and using the possibility of safeguarding its loss," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 378(2), pages 423-426.
    • Handle: RePEc:eee:phsmap:v:378:y:2007:i:2:p:423-426
    DOI: 10.1016/j.physa.2006.12.029
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    References listed on IDEAS

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    1. Fishburn, Peter C, 1977. "Mean-Risk Analysis with Risk Associated with Below-Target Returns," American Economic Review, American Economic Association, vol. 67(2), pages 116-126, March.
    2. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
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    Cited by:

    1. Maciel, Leandro, 2021. "A new approach to portfolio management in the Brazilian equity market: Does assets efficiency level improve performance?," The Quarterly Review of Economics and Finance, Elsevier, vol. 81(C), pages 38-56.
    2. Chen, Wei, 2015. "Artificial bee colony algorithm for constrained possibilistic portfolio optimization problem," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 429(C), pages 125-139.
    3. Armin Mahmoudi & Leila Hashemi & Milad Jasemi & James Pope, 2021. "A comparison on particle swarm optimization and genetic algorithm performances in deriving the efficient frontier of stocks portfolios based on a mean‐lower partial moment model," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(4), pages 5659-5665, October.

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    Keywords

    Portfolio; CAPM; Risk; Insurance;
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