Portfolio Construction and Tail Risk

Posted: 25 Jan 2015 Last revised: 20 May 2019

See all articles by Chris Downing

Chris Downing

BlackRock

Ananth Madhavan

BlackRock, Inc.

Ajit Singh

United Nations; University of Cambridge

Alex Ulitsky

BlackRock

Date Written: January 23, 2015

Abstract

In the wake of the financial crisis, investors are increasingly concerned with ways to mitigate extreme losses. We analyze various approaches to enhancing traditional portfolio construction with tail-risk control. Interestingly, we find investors have better managed tail-risk using a minimum-volatility overlay strategy than explicitly penalizing extreme losses via conditional value-at-risk (CVaR). From a practical perspective, this solution can be cheap and easy to implement because it will not result in a rebalancing of the fund, and various minimum-volatility products are readily available on the market.

Keywords: tail risk, portfolio construction, mean-variance optimization, conditional value at risk

JEL Classification: G20, G11

Suggested Citation

Downing, Christopher T. and Madhavan, Ananth and Singh, Ajit and Ulitsky, Alex, Portfolio Construction and Tail Risk (January 23, 2015). Available at SSRN: https://ssrn.com/abstract=2554642 or http://dx.doi.org/10.2139/ssrn.2554642

Christopher T. Downing

BlackRock ( email )

400 Howard Street
San Francisco, CA 94105
United States

Ananth Madhavan (Contact Author)

BlackRock, Inc. ( email )

400 Howard Street
San Francisco, CA 94105
United States

Ajit Singh

United Nations ( email )

New York, NY 10017
United States

University of Cambridge ( email )

Austin Robinson Building
Sidgwick Avenue
Cambridge, CB3 9DD
United Kingdom
+ 44 1223 350434 (Phone)
+ 44 1223 740479 (Fax)

Alex Ulitsky

BlackRock ( email )

400 Howard St.
San Francisco, CA 94105
United States

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