Multicriteria Portfolio Choice and Downside Risk

TIJAB (The International Journal of Applied Business)

Stocks are one of the popular investment instruments traded in the capital market. The popularity of stock purchase has developed along with the massive financial literacy movement. However, the massiveness of this movement must be balanced with knowledge and expertise in managing stock instruments since they have a high return rate and high risk. One way to manage stocks is by developing an optimal stock portfolio based on the Markowitz model. The Markowitz model is a method that formulates the elements of return and risk in an investment, and specifically the elements of risk can be minimized through diversification and combination of various investment instruments into a portfolio. By using the Markowitz method, investors can take advantage of all available information as a basis for maximizing the portfolio. This study aimed to determine which stocks can form an optimal portfolio, especially in the era of the COVID 19 pandemic and the optimal proportion of the portfolio that is ...

Jurnal Teknologi

The premise of this paper is providing a theoretical model for a novel way to portfolio optimization using generalized hyperbolic distribution during crisis with risk measures, expected shortfall and standard deviation. Getting good expected returns from investing in portfolio assets like stocks, bonds and currencies during crisis period chosen is harder where the risks cannot be diverted because of disruptive financial jolts i.e. sudden and unprecedented events like subprime mortgage crises in 2008. Multivariate generalized hyperbolic distribution on joint distribution of risk factors from stocks, bonds and currencies is used because it can simplify the risk factors calculation by allowing them to be linearized. The results show the premise is true. The contributions are discovering both the appropriate probability distribution and risk measure will determine whether the portfolio is optimal or not. The practical application will be taking care of the risk to take care of the profit.

International Journal of Economic Sciences, 2021

Classical models for the construction of an investment portfolio do not account for fundamental values of companies considered. In our approach, we extend the portfolio choice by adding a new criterion connected with the fundamental values of companies to the classical criteria of expected return and risk. It is assumed that an investor selects stocks according to their attractiveness, measured by some indicators of economic and financial situation of companies. In this approach, portfolios are assessed according to three criteria: their expected returns, risk (measured by variance of returns) and economic situation of the companies (measured by some indicators). In this article, we consider the book value to price ratio as a measure of the fundamental value of a company. We discuss an algorithm for constructing portfolios with this fundamental value criterion based on analytical solutions for relevant optimization problems. In the optimization problem, we consider minimizing variance with constrains on expected return and attractiveness of investment. We also present empirical examples of calculating effective portfolios of stocks listed on the Warsaw Stock Exchange and compare their performance with effective portfolios built according to the classical Markowitz approach. By adding an additional criterion of the book to market value, we received portfolios with a higher average realized rate of return compared with the classical Markowitz model. Thus, it can be useful for investors in the capital market to incorporate an additional criterion connected with fundamental values of companies when preparing a model of stock returns.

The aim of this report is to examine investment risk and returns by looking at the relationship between a stock and an index using the Markowitz Modern Portfolio theory. Monthly Data on IBM and Dow Jones were obtained from yahoo finance for the period 1995 to 2015. A linear regression was utilized to analyze the relationship between the Dow Jones index and the IBM stock returns. The results revealed that there is a positive relationship between IBM stock returns and the Dow Jones index. In their decision making, investors and policy makers are, recommended to additionally consider the micro and macro demand and supply forces that could possibly influence ROI. In other to avoid or reduce risk.

2019

Stock exchanges are constantly prone to instability caused by asset bubbles. Risk level within the stock exchanges stands as the main concern for the financial investors. Stock prices are influenced by the choices completed on the domestic and international environment. The study intends to measure the risk level of the Prague Stock Exchange (PSE) from the internal risk perspectives. Portfolio diversification formula has been implemented to obtain the risk level of the PSE from 2000 till 2017. Stock prices and the trade volume of the listed companies in the PSE were collected from the Thomson Reuters Eikon database. PSE has been considered as a portfolio based on the number of listed companies on the respective years. The results confirm that financial investors in the PSE would be compensated for the risk exposure. Diversification risk and weighted average returns from 2000 till 2017 were almost moving identically. The results indicate that PSE was influenced from the last financia...

Annals of Faculty of Economics, 2013

Nowadays, the most dominant characteristics of the financial environment are instability, variability, riskiness and uncertainty. It is difficult to find a field where the decision making process is risk-free. This statement is especially true in case of financial investments according to which risk taking is rewarded. But it is also true that the financial market participants cannot be completely avoided risks, but there are many options for managing and minimizing them. One of the most well-known theories of financial instruments' risk minimization is the modern portfolio theory, which is the collection of tools and techniques by which a risk-averse investor may construct an optimal portfolio. In portfolio theory it is also known the possibility of risky assets diversification to obtain the optimal return/risk ratio. Consequently, this paper aims to examine the efficient portfolio alternatives by determination of performance ratios based on CAPM model and modern portfolio theo...

South East European Journal of Economics and Business

Diversification potential enables investors to manage their risk and decrease risk exposure. Good diversification policy is a safety net that prevents a portfolio from losing its value. A well-diversified portfolio consists of different categories of property with low correlations, while highly correlated markets have the feature of low possibilities for diversification. The biggest riddle in the world of investments is to find the optimal portfolio within a set of available assets with limited capital. There are numerous studies and mathematical models that deal with portfolio investment strategies. These strategies take advantage of diversification by spreading risk over several financial assets. Modern portfolio theory seeks to find the optimal model with the best results. This paper tries to identify relationships between returns of companies traded in South-East European equity markets. A Markowitz mean-variance (MV) portfolio optimization method is used to identify possibiliti...

Acta Oeconomica, 2019

Risk captured through the volatility of stock markets stands as the essential concern for financial investors. The financial crisis of 2008 demonstrated that stock markets are highly integrated. Slovakia, Hungary and Poland went through identical centralist economic arrangement, but nowadays operate under diverse stock markets, monetary system and tax structure. The study aims to measure the risk level of the Slovak Stock Market (SAX index), Budapest Stock Exchange (BUX index) and Poland Stock Market (WIG20 index) based on the portfolio diversification model. Results of the study provide information on the diversification benefits generated when SAX, BUX and WIG20 join their stock markets. The study considers that each stock index represents an independent portfolio. Portfolios are built to stand on the available companies that are listed on each stock index from 2007 till 2017. The results of the study show that BUX generates the lowest risk and highest weighted average return. In ...

BCP business & management, 2023

Since early 2020, global economy and financial markets have faced enormous turbulence due to the spread of COVID-19. Against this backdrop, this paper is drafted to help investors better understand portfolio management by finding how various constraints affect asset allocation under two dynamic modeling: Markowitz and Index. Raw data of ten stocks from four popular sectors and the SPX500 are collected as the source of this paper. By processing raw data and using the processed data, this paper reaches the conclusion that the stock market stays resilient to external shocks. As mentioned, there are two models that would be the focus of this paper: Markowitz Model and Index Model. Both of which would be analyzed under one non-constrain and four simulated constraints to examine portfolio performance. Comparing the results, Index Model generates higher numerical results with respect to associated risk than these produced based on the Markowitz Model. On the other hand, the portfolios constructed based on the results of the Index Model performs better under most of the constraints than the ones based on the Markowitz Model in terms of Sharpe ratio. Based on the concluded results, this paper meets by demonstrating stock investors a potential approach to mitigate risks during unexpected shocks with broad impacts.

In this paper we examine the issue of possible portfolio diversification benefits into four selected Eastern stock markets: Czech Republic, Hungary, Poland and Russia. International Portfolio investment gradually increased during the late 2000's in this region. We construct international portfolios in dollars and local currencies using four different portfolio construction techniques, including two naïve portfolios, with random and equal weights and two professional ones, using past performance and the Markowitz mean variance portfolio method. Using a series of simulations, many portfolios are constructed per category using our data. The portfolios are then evaluated with standard portfolio evaluation methods. Our results confirm that the Markowitz portfolio construction methodology gives best results and at the same time we show that low correlation among the markets investigated allows the realization of important diversification benefits both in dollar and local currencies.