Portfolio selection with limited downside risk |
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| Affiliation: | 1. School of Finance, Nanjing University of Finance and Economics, Nanjing, China;2. Department of Applied Finance, Macquarie Business School, Macquarie University, Sydney, Australia;3. Investors Mutual Limited (IML), Sydney, Australia;4. School of Finance, Shandong University of Finance and Economics, Jinan, China;5. School of Finance, Central University of Finance and Economics, Beijing, China;1. McDonough School of Business, Georgetown University, Washington D.C. 20057, United States;2. Monash Business School, Melbourne 3145, Victoria, Australia;3. NYU Stern School of Business, New York, NY 10012, United States;4. College of Business, Florida International University, Miami, FL 33199, United States |
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| Abstract: | ![]()
A safety-first investor maximizes expected return subject to a downside risk constraint. Arzac and Bawa [Arzac, E.R., Bawa, V.S., 1977. Portfolio choice and equilibrium in capital markets with safety-first investors. Journal of Financial Economics 4, 277–288.] use the Value at Risk as the downside risk measure. The paper by Gourieroux, Laurent and Scaillet estimates the optimal safety-first portfolio by a kernel-based method, we exploit the fact that returns are fat-tailed, and propose a semi-parametric method for modeling tail events. We also analyze a portfolio containing the two stocks used by Gourieroux et al. and discuss the merits of the safety-first approach. |
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