AN ANALYTICAL FRAMEWORK FOR EXPLAINING RELATIVE PERFORMANCE OF CAPM BETA AND DOWNSIDE BETA

2009 ◽  
Vol 12 (03) ◽  
pp. 341-358 ◽  
Author(s):  
DON U. A. GALAGEDERA
Keyword(s):  
Risk Measures ◽  
Systematic Risk ◽  
Analytical Framework ◽  
Portfolio Returns ◽  
Market Portfolio ◽  
Empirical Performance ◽  
Capm Beta ◽  
Using Data ◽  
Risk Free Rate ◽  
Mean Variance

Even though investors' view of risk is generally regarded as related to the downside of the return distribution the CAPM beta is still a widely used measure of systematic risk. A number of studies compare the empirical performance of CAPM beta and downside beta in explaining the variation in portfolio returns and report mixed results. This paper provides a basis for explaining such mixed results. Using data generating processes in the mean-variance and mean-lower partial moment frameworks, analytical relationships between the CAPM beta and downside beta are derived. The derived relationships reveal that the association between the two systematic risk measures is to a great extent dependent on the volatility of the market portfolio returns and the deviation of the target rate from the risk-free rate. How the relationships derived here may be used in practice is demonstrated using empirical data.

scholarly journals CHARACTERISTICS OF OMEGA-OPTIMIZED PORTFOLIOS AT DIFFERENT LEVELS OF THRESHOLD RETURNS

2014 ◽  
Vol 12 (2) ◽  
pp. 245-265 ◽  
Author(s):  
Renaldas Vilkancas
Keyword(s):  
Portfolio Optimization ◽  
Risk Measures ◽  
High Threshold ◽  
Portfolio Performance ◽  
Threshold Values ◽  
Portfolio Returns ◽  
Upside Risk ◽  
And Performance ◽  
Risk Free Rate ◽  
Different Levels

There is little literature considering effects that the loss-gain threshold used for dividing good and bad outcomes by all downside (upside) risk measures has on portfolio optimization and performance. The purpose of this study is to assess the performance of portfolios optimized with respect to the Omega function developed by Keating and Shadwick at different levels of the threshold returns. The most common choices of the threshold values used in various Omega studies cover the risk-free rate and the average market return or simply a zero return, even though the inventors of this measure for risk warn that “using the values of the Omega function at particular points can be critically misleading” and that “only the entire Omega function contains information on distribution”. The obtained results demonstrate the importance of the selected values of the threshold return on portfolio performance – higher levels of the threshold lead to an increase in portfolio returns, albeit at the expense of a higher risk. In fact, within a certain threshold interval, Omega-optimized portfolios achieved the highest net return, compared with all other strategies for portfolio optimization using three different test datasets. However, beyond a certain limit, high threshold values will actually start hurting portfolio performance while meta-heuristic optimizers typically are able to produce a solution at any level of the threshold, and the obtained results would most likely be financially meaningless.

scholarly journals CAN INVESTMENT IN MICROFINANCE FUNDS IMPROVE RISK-RETURN CHARACTERISTICS OF A PORTFOLIO?

2014 ◽  
Vol 20 (4) ◽  
pp. 673-695 ◽  
Author(s):  
Karel Janda ◽  
Gordon Rausser ◽  
Barbora Svárovská
Keyword(s):  
Financial Indicators ◽  
Fixed Income ◽  
Socially Responsible ◽  
Investment Funds ◽  
Risk Return ◽  
Market Portfolio ◽  
Bond Portfolios ◽  
Capm Beta ◽  
Returns On Investment ◽  
Mean Variance

This article is concerned with contribution of microfinance investment funds to a sustainable financial portfolio. With regard to the dependence of microfinance funds’ returns on the performance of stock and fixed income markets in developed and emerging economies we find slightly negative correlation when measured by the portfolio beta measure. Our regression analysis confirms that returns on investment in microfinance investment funds exceed the returns on the market portfolio. This result together with reported near-to-zero beta estimates as a proxy for the systematic risk may be taken to be a clear financial advantage of an inclusion of microfinance assets in a portfolio compared to pure stock or bond portfolios. The results based on CAPM beta and Jensen's alpha are confirmed by mean-variance spanning test. We show that the socially responsible investors may invest into microfinance without sacrifice with respect to pure financial indicators.

scholarly journals The beauty contest between systemic and systematic risk measures: Assessing the empirical performance

2020 ◽  
Vol 58 ◽  
pp. 316-332
Author(s):  
Fabrizio Cipollini ◽  
Alessandro Giannozzi ◽  
Fiammetta Menchetti ◽  
Oliviero Roggi
Keyword(s):  
Risk Measures ◽  
Systematic Risk ◽  
Empirical Performance ◽  
Beauty Contest

Maximum Drawdown and Risk Tolerances

2015 ◽  
Vol 18 (01) ◽  
pp. 1550003
Author(s):  
Mohammad Reza Tavakoli Baghdadabad
Keyword(s):  
Lower Risk ◽  
Risk Measures ◽  
Risk Measure ◽  
Management Styles ◽  
Portfolio Returns ◽  
Investment Opportunity Set ◽  
Conventional Models ◽  
Maximum Drawdown ◽  
Mean Variance ◽  
Special Case

Due to the numerous studies of asymmetric portfolio returns, asymmetric risk measures have widely been used in risk management with extensive uses on the methodology of n-degree lower partial moment (LPM). Unlike the initial studies, we use the risk measure of n-degree maximum drawdown, which is a special case of n-degree LPM, to investigate the reduction impacts of n-degree maximum drawdown risk on risk tolerances generated by management styles from US equity-based mutual funds. We found that skewness does not impose any significant problems on the model of n-degree maximum drawdown. Thus, the tolerance effect of maximum drawdown risk in the n-degree M-DRM models is a decrease in fund returns. The n-degree CM-DRM optimization model decreased investors' risk more than two conventional models. Thus, the M-DRM can be accommodated with risk-averse investors' approach. The efficient set of mean-variance choices from the investment opportunity set, as described by Markowitz, shows that the n-degree CM-DRM algorithms create this set with lower risk than other algorithms. It implies that the mean-variance opportunity set generated by the n-degree CM-DRM creates lower risk for a given return than covariance and CLPM.

scholarly journals The Choice Channel of Financial Innovation

2021 ◽  
Vol 13 (2) ◽  
pp. 333-372
Author(s):  
Felipe S. Iachan ◽  
Plamen T. Nenov ◽  
Alp Simsek
Keyword(s):  
Portfolio Choice ◽  
Risk Premium ◽  
Financial Innovation ◽  
The United States ◽  
Risky Assets ◽  
Market Participants ◽  
Portfolio Returns ◽  
Market Portfolio ◽  
Risk Free Rate ◽  
Free Rate

Financial innovation in recent decades has expanded portfolio choice. We investigate how greater choice affects investors’ savings and asset returns. We establish a choice channel by which greater portfolio choice increases investors’ savings—by enabling them to earn the aggregate risk premium or take speculative positions. In equilibrium, portfolio customization (access to risky assets beyond the market portfolio) reduces the risk-free rate. Participation (access to the market portfolio) reduces the risk premium but typically increases the risk-free rate. Empirically, stock market participants in the United States save more than nonparticipants and have increasingly dispersed portfolio returns, consistent with the choice channel. (JEL E21, G11, G12, G51)

scholarly journals Testing the CAPM in Bosnia and Herzegovina with Continuously Compounded Returns

2013 ◽  
Vol 8 (1) ◽  
pp. 35-43
Author(s):  
Azra Zaimović
Keyword(s):  
Stock Returns ◽  
Bosnia And Herzegovina ◽  
Capital Markets ◽  
Attractive Alternative ◽  
Security Market ◽  
Portfolio Returns ◽  
Developed Markets ◽  
Market Portfolio ◽  
International Investors ◽  
Risk Free Rate

Abstract The capital markets of neighboring transitional Western Balkan countries have attracted a lot of interest from domestic and international investors in the last decade, who view them as an attractive alternative to investing in more developed markets. These markets are characterized by higher returns, and higher volatility of stock returns as compared to those of developed markets. The recent economic and financial crises devastated capital markets worldwide. The new Bosnian capital market faced its hardest times following the withdrawal of international investors. The aim of this paper is to explore whether there is a standard relation between stock returns and market portfolio returns, as proposed by the Sharpe-Lintner Capital Asset Pricing Model (CAPM), in the stock market of Bosnia and Herzegovina. We tested the model hypotheses with a traditional two-stage regression procedure using the OLS method, using continuously compounded (logarithmic) returns on stocks. Our study indicates that despite the crisis the systematic risk measured by the beta coefficient is priced and that the beta premium is positive. Nevertheless, the Security Market Line (SML) intercepts the ordinate lower than the risk free rate of return. Other factors might also influence stock returns in this market.

scholarly journals Portfolio Selection and Optimization through Neural Networks and Markowitz Model: A Case of Pakistan Stock Exchange Listed Companies

2019 ◽  
Vol 5 (1) ◽  
pp. 183-196
Author(s):  
Javed Iqbal ◽  
Moeed Ahmad Sandhu ◽  
Shaheera Amin ◽  
Aliya Manzoor
Keyword(s):  
Neural Networks ◽  
Time Series ◽  
Empirical Data ◽  
Stock Exchange ◽  
Expected Returns ◽  
Information Ratio ◽  
Portfolio Returns ◽  
Risk Free Rate ◽  
Mean Variance ◽  
Free Rate

This paper used artificial neural networks (ANNs) time series predictor for approximating returns of Pakistan Stock Exchange (PSX) listed 100 companies. These projected returns are then substituted into expected returns in the Markowitz’s Mean Variance (MV) portfolio Model. For comparison empirical data used is closing prices of PSX listed stocks, Karachi Inter Bank Offer Rates (KIBOR) as risk free rate and KSE-all share index as benchmark. The Portfolio returns are compared for two datasets by employing various constraints like budget, transaction costs, and turnover constraints. The value of portfolios is measured through Sharpe ratio and Information ratio. Both Sharpe and Information ratios support use of ANNs as return predictor and optimisation tool over simple MV model implemented for empirical data as well as predicted data. ANNs framework performed better in both Long and Short positions and its portfolio returns are significantly higher as compared with MV.

scholarly journals Modified Mean-Variance Risk Measures for Long-Term Portfolios

Mathematics ◽  
2021 ◽  
Vol 9 (2) ◽  
pp. 111
Author(s):  
Hyungbin Park
Keyword(s):  
Risk Measures ◽  
Risk Measure ◽  
Investment Strategy ◽  
Stochastic Volatility Model ◽  
Heston Model ◽  
Volatility Model ◽  
Variance Risk ◽  
Investment Portfolios ◽  
Mean Variance

This paper proposes modified mean-variance risk measures for long-term investment portfolios. Two types of portfolios are considered: constant proportion portfolios and increasing amount portfolios. They are widely used in finance for investing assets and developing derivative securities. We compare the long-term behavior of a conventional mean-variance risk measure and a modified one of the two types of portfolios, and we discuss the benefits of the modified measure. Subsequently, an optimal long-term investment strategy is derived. We show that the modified risk measure reflects the investor’s risk aversion on the optimal long-term investment strategy; however, the conventional one does not. Several factor models are discussed as concrete examples: the Black–Scholes model, Kim–Omberg model, Heston model, and 3/2 stochastic volatility model.

Absence of the weekend effect and industry-style portfolios

2019 ◽  
Vol 12 (4) ◽  
pp. 463-475
Author(s):  
Selma Izadi ◽  
Abdullah Noman
Keyword(s):  
New York ◽  
Stock Market ◽  
Structural Breaks ◽  
Stock Exchange ◽  
Structural Break ◽  
Weekend Effect ◽  
Content Type ◽  
Market Portfolio ◽  
The Us ◽  
Using Data

Purpose The existence of the weekend effect has been reported from the 1950s to 1970s in the US stock markets. Recently, Robins and Smith (2016, Critical Finance Review, 5: 417-424) have argued that the weekend effect has disappeared after 1975. Using data on the market portfolio, they document existence of structural break before 1975 and absence of any weekend effects after that date. The purpose of this study is to contribute some new empirical evidences on the weekend effect for the industry-style portfolios in the US stock market using data over 90 years. Design/methodology/approach The authors re-examine persistence or reversal of the weekend effect in the industry portfolios consisting of The New York Stock Exchange (NYSE), The American Stock Exchange (AMEX) and The National Association of Securities Dealers Automated Quotations exchange (NASDAQ) stocks using daily returns from 1926 to 2017. Our results confirm varying dates for structural breaks across industrial portfolios. Findings As for the existence of weekend effects, the authors get mixed results for different portfolios. However, the overall findings provide broad support for the absence of weekend effects in most of the industrial portfolios as reported in Robins and Smith (2016). In addition, structural breaks for other weekdays and days of the week effects for other days have also been documented in the paper. Originality/value As far as the authors are aware, this paper is the first research that analyzes weekend effect for the industry-style portfolios in the US stock market using data over 90 years.

scholarly journals Heterogeneous Beliefs and Risk-Neutral Skewness

2012 ◽  
Vol 47 (4) ◽  
pp. 851-872 ◽  
Author(s):  
Geoffrey C. Friesen ◽  
Yi Zhang ◽  
Thomas S. Zorn
Keyword(s):  
Factor Analysis ◽  
Latent Variables ◽  
Stock Options ◽  
Systematic Risk ◽  
Heterogeneous Beliefs ◽  
Firm Level ◽  
Cross Sectional ◽  
Skewness Factor ◽  
Risk Neutral ◽  
Using Data

AbstractThis study tests whether belief differences affect the cross-sectional variation of risk-neutral skewness using data on firm-level stock options traded on the Chicago Board Options Exchange from 2003 to 2006. We find that stocks with greater belief differences have more negative skews, even after controlling for systematic risk and other firm-level variables known to affect skewness. Factor analysis identifies latent variables linked to risk and belief differences. The belief factor explains more variation in the risk-neutral skewness than the risk-based factor. Our results suggest that belief differences may be one of the unexplained firm-specific components affecting skewness.

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