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
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: Suggested Citation