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Portfolio Selection with Uncertainty Measures Consistent with Additive Shifts

Author

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  • Rosella Giacometti
  • Sergio Ortobelli
  • Tomáš Tichý

Abstract

Assuming a non-satiable risk-averse investor, the standard approach to portfolio selection suggests discarding of all inefficient investment in terms of mean return and its standard deviation ratio within its first step. However, in literature we can find many alternative dispersion and risk measures that can help us to identify the most suitable investment opportunity. In this work two new dispersion measures, fulfilling the condition that ""more is better than less"" are proposed. Moreover, their distinct characteristics are analysed and empirically compared. In particular, starting from the definition of dispersion measures, we discuss the property of consistency with respect to additive shifts and we examine two dispersion measures that satisfy this property. Finally, we empirically compare the proposed dispersion measures with the standard deviation and the conditional value at risk on the US stock market. Moreover, within the empirical example the so called ""alarm"" is incorporated in order to predict potential fails of the market.

Suggested Citation

  • Rosella Giacometti & Sergio Ortobelli & Tomáš Tichý, 2015. "Portfolio Selection with Uncertainty Measures Consistent with Additive Shifts," Prague Economic Papers, Prague University of Economics and Business, vol. 2015(1), pages 3-16.
    • Handle: RePEc:prg:jnlpep:v:2015:y:2015:i:1:id:497:p:3-16
    DOI: 10.18267/j.pep.497
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    1. repec:prg:jnlpep:v:preprint:id:636:p:1-28 is not listed on IDEAS
    2. Bohumil Stádník & Václav Žďárek, 2017. "Volatility Strangeness of Bonds - How to Define and What Does it Bring?," Prague Economic Papers, Prague University of Economics and Business, vol. 2017(5), pages 602-629.
    3. Aleš Kresta, 2015. "Application of Performance Ratios in Portfolio Optimization," Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, Mendel University Press, vol. 63(6), pages 1969-1977.

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    More about this item

    Keywords

    alarm signal; dispersion measure; investment; Sharpe ratio; stochastic dominance; systemic risk;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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