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Portfolio Construction by Using Different Risk Models: A Comparison among Diverse Economic Scenarios

Author

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  • Ahmed Imran Hunjra

    (University Institute of Management Sciences-PMAS—Arid Agriculture University Rawalpindi, Rawalpindi, Punjab 46000, Pakistan)

  • Suha Mahmoud Alawi

    (Department of Finance, Faculty of Economics and Administration, King Abdulaziz University, Jeddah 22322, Saudi Arabia)

  • Sisira Colombage

    (Federation Business School, Federation University Australia, Clyde Road, Berwick, VIC 3806, Australia)

  • Uroosa Sahito

    (Department of Business Administration, University of Sufism and Modern Sciences Bhitshah, Sindh 70140, Pakistan)

  • Mahnoor Hanif

    (University Institute of Management Sciences-PMAS—Arid Agriculture University Rawalpindi, Rawalpindi, Punjab 46000, Pakistan)

Abstract

We aim to construct portfolios by employing different risk models and compare their performance in order to understand their appropriateness for effective portfolio management for investors. Mean variance (MV), semi variance (SV), mean absolute deviation (MaD) and conditional value at risk (CVaR) are considered as risk measures. The price data were extracted from the Pakistan stock exchange, Bombay stock exchange and Dhaka stock exchange under diverse economic conditions such as crisis, recovery and growth. We take the average of GDP of the selected period of each country as a cut-off point to make three economic scenarios. We use 40 stocks from the Pakistan stock exchange, 92 stocks from the Bombay stock exchange and 30 stocks from the Dhaka stock exchange. We compute optimal weights using global minimum variance portfolio (GMVP) for all stocks to construct optimal portfolios and analyze the data by using MV, SV, MaD and CVaR models for each subperiod. We find that CVaR (95%) gives better results in each scenario for all three countries and performance of portfolios is inconsistent in different scenarios.

Suggested Citation

  • Ahmed Imran Hunjra & Suha Mahmoud Alawi & Sisira Colombage & Uroosa Sahito & Mahnoor Hanif, 2020. "Portfolio Construction by Using Different Risk Models: A Comparison among Diverse Economic Scenarios," Risks, MDPI, vol. 8(4), pages 1-23, November.
    • Handle: RePEc:gam:jrisks:v:8:y:2020:i:4:p:126-:d:453526
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    References listed on IDEAS

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    2. Zaimovic Azra & Arnaut-Berilo Almira & Bešlija Rijad, 2024. "International Portfolio Diversification Benefits: An Empirical Investigation of the 28 European Stock Markets During the Period 2014–2024," South East European Journal of Economics and Business, Sciendo, vol. 19(1), pages 96-112.
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    5. Adler Haymans MANURUNG & Fadh Fauzi HIBATULLAH & Jadongan SIJABAT, 2023. "Stock Selection Using Roy Criteria to Construct a Portfolio and the Effects of Variables on Portfolio Return," Journal of Finance and Investment Analysis, SCIENPRESS Ltd, vol. 12(3), pages 1-2.

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