Portfolio Construction with Downside Risk

Chapter 12 in: Portfolio Theory and Management, H. Kent Baker and Gregory Filbeck (eds.), Oxford University Press, 2013, pp. 268-292

34 Pages Posted: 25 Mar 2008 Last revised: 9 Nov 2020

See all articles by Harald Lohre

Harald Lohre

Invesco; Centre for Financial Econometrics, Asset Markets and Macroeconomic Policy, Lancaster University Management School

Thorsten Neumann

Union Investment

Thomas Winterfeldt

DG HYP

Date Written: March 18, 2009

Abstract

Portfolio construction seeks an optimal trade-off between a portfolio's mean return and its associated risk. Since risk may not be properly described by return volatility we optimize portfolios with respect to various measures of downside risk in an empirical out-of-sample setting. These optimizations are successful for most of the investigated measures when assuming perfect foresight of expected returns, moreover, these findings still hold when using more naive return estimates. The reductions in downside risk are most convincing for semivariance, semideviation, CVaR and loss penalty while value at risk and measures related to skewness appear rather useless for portfolio construction purposes.

Keywords: Portfolio Optimization, Downside Risk

JEL Classification: G11, G12, D81

Suggested Citation

Lohre, Harald and Neumann, Thorsten and Winterfeldt, Thomas, Portfolio Construction with Downside Risk (March 18, 2009). Chapter 12 in: Portfolio Theory and Management, H. Kent Baker and Gregory Filbeck (eds.), Oxford University Press, 2013, pp. 268-292, Available at SSRN: https://ssrn.com/abstract=1112982 or http://dx.doi.org/10.2139/ssrn.1112982

Centre for Financial Econometrics, Asset Markets and Macroeconomic Policy, Lancaster University Management School

Bailrigg
Lancaster LA1 4YX
United Kingdom

HOME PAGE: http://www.lancaster.ac.uk/lums/research/research-centres/financial-econometrics/

Thorsten Neumann

Union Investment ( email )

Wiesenhüttenplatz 25
Frankfurt am Main, 60329
Germany

Thomas Winterfeldt

DG HYP ( email )

60265 Frankfurt am Main
Germany

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