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Mean-Variance Optimization Is a Good Choice, But for Other Reasons than You Might Think

Faculty of Economics and Management, Free University of Bozen-Bolzano, 39100 Bolzano, Italy
Risks 2020, 8(1), 29; https://doi.org/10.3390/risks8010029
Received: 22 January 2020 / Revised: 8 March 2020 / Accepted: 10 March 2020 / Published: 14 March 2020
Mean-variance portfolio optimization is more popular than optimization procedures that employ downside risk measures such as the semivariance, despite the latter being more in line with the preferences of a rational investor. We describe strengths and weaknesses of semivariance and how to minimize it for asset allocation decisions. We then apply this approach to a variety of simulated and real data and show that the traditional approach based on the variance generally outperforms it. The results hold even if the CVaR is used, because all downside risk measures are difficult to estimate. The popularity of variance as a measure of risk appears therefore to be rationally justified. View Full-Text
Keywords: downside risk; semivariance; skewness; parameter uncertainty; portfolio optimization downside risk; semivariance; skewness; parameter uncertainty; portfolio optimization
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MDPI and ACS Style

Rigamonti, A. Mean-Variance Optimization Is a Good Choice, But for Other Reasons than You Might Think. Risks 2020, 8, 29. https://doi.org/10.3390/risks8010029

AMA Style

Rigamonti A. Mean-Variance Optimization Is a Good Choice, But for Other Reasons than You Might Think. Risks. 2020; 8(1):29. https://doi.org/10.3390/risks8010029

Chicago/Turabian Style

Rigamonti, Andrea. 2020. "Mean-Variance Optimization Is a Good Choice, But for Other Reasons than You Might Think" Risks 8, no. 1: 29. https://doi.org/10.3390/risks8010029

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