Managing Downside Risk for Portfolio Optimization

Management Accounting and Business Finance 1 (1), 10-21

Posted: 26 May 2017 Last revised: 23 Nov 2018

Date Written: July 1, 2014

Abstract

In the past decade, stock markets around the world have experienced unprecedented volatility. The steep fall in market values in most markets has adversely affected the investor interest. As a consequence, there is flight of investor capital away from the market. Use of traditional portfolio construction strategies to construct optimal portfolios, which maximize returns and minimize risk, is extremely difficult in such a volatile environment. This has led to a search for portfolio construction using new, innovative asset allocation and selection strategies. Construction of portfolio using the Martin Ratio or Ulcer Performance Index (UPI) is one such strategy designed specifically to address investor’s stress of holding a stock by reducing downside volatility and providing investors with higher than benchmark returns. It measures the depth and duration of drawdown in prices from previous high. The purpose of this study is to use the Martin’s Ratio to construct a model portfolio from amongst CNX Nifty 50 stocks and to compare its returns with the broad market returns. The study shows that the model portfolio constructed comprises minimum downward volatility stocks and yields an annual return higher than the market return. Hence, it is a very significant tool for identification of stocks for portfolio construction and optimisation.

Keywords: portfolio optimisation, benchmark returns, downside volatility

JEL Classification: G11, G17, G39

Suggested Citation

Chelawat, CA. (Dr.) Hemlata and Trivedi, I.V., Managing Downside Risk for Portfolio Optimization (July 1, 2014). Management Accounting and Business Finance 1 (1), 10-21, Available at SSRN: https://ssrn.com/abstract=2973827

CA. (Dr.) Hemlata Chelawat (Contact Author)

ML Sukhadia University ( email )

University Rd
Rajasthan
Udaipur, Rajasthan 313001
India

I.V. Trivedi

ML Sukhadia University ( email )

University Rd
Rajasthan
India

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