On the (Mis)Use of Conditional Value-at-Risk and Spectral Risk Measures for Portfolio Selection - A Comparison with Mean-Variance Analysis

29 Pages Posted: 9 Oct 2012

Date Written: March 26, 2012

Abstract

We study portfolio selection using Conditional Value-at-Risk and, as its natural extension, spectral risk measures instead of the variance. We do not focus only on the derivation of the efficient frontiers, but also consider the choice of optimal portfolios within an integrated framework. We find that spectral risk measures tend towards corner solutions. If a risk free asset exists, diversification is never optimal. Similarly, for risky assets we obtain only limited diversification. The reason is that spectral risk measures are based on a regulatory concept of diversification that differs fundamentally from the reward-risk tradeoff underlying the traditional mean-variance framework.

Keywords: Portfolio selection, Spectral risk measures, Conditional Value-at-Risk, Rewardrisk model, Efficient frontier, Optimal portfolio

JEL Classification: G11, G21, D81

Suggested Citation

Brandtner, Mario, On the (Mis)Use of Conditional Value-at-Risk and Spectral Risk Measures for Portfolio Selection - A Comparison with Mean-Variance Analysis (March 26, 2012). 29th International Conference of the French Finance Association (AFFI) 2012. Available at SSRN: https://ssrn.com/abstract=2083654 or http://dx.doi.org/10.2139/ssrn.2083654

Mario Brandtner (Contact Author)

University of Jena ( email )

Furstengraben 1
Jena, Thuringa 07743
Germany

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