Constraining Shortfall, April 2010
14 Pages Posted: 12 May 2010
Date Written: April 15, 2010
Abstract
In this study, our goal is to adapt mean-variance optimization to produce active portfolios with less exposure to extreme losses than normal optimized portfolios. Specifically, we illustrate how extreme risk can be incorporated into portfolio construction in a straightforward way by constraining the shortfall beta of the optimal portfolio. Our simple empirical examples suggest that constraining shortfall beta may offer some downside protection in turbulent periods without sacrificing performance over longer periods
Keywords: constraining shortfall, mean-variance, optimization, portfolios extreme losses, less exposure risk, portfolio construction shortfall, beta optimal protection
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