Optimal asset allocation aid system: From “one-size” vs “tailor-made” performance ratio |
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Authors: | Simone Farinelli Manuel Ferreira Damiano Rossello Markus Thoeny Luisa Tibiletti |
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Institution: | 1. Credit and Country Risk Control, UBS, CH-8098 Zurich, Switzerland;2. Investment and Quantitative Research, Cantonal Bank of Zurich, CH-8010 Zurich, Switzerland;3. Department of Economics and Quantitative Methods, University of Catania, Corso Italia 55, 95129 Catania, Italy;4. Department of Statistics and Mathematics, University of Torino, Piazza Arbarello 8, I-10122 Torino, Italy |
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Abstract: | Optimal asset allocation well-fitting investors’ goals is a pressing challenge in risk management. Making a step forward to the Sharpe ratio, the parameter-dependent Sortino–Satchell, Generalized Rachev and Farinelli–Tibiletti performance ratios are suggested for personalizing asset allocation. Tailor-made optimal asset paths for five different investor risk profiles are traced over a rolling 12 month investing horizon. Our simulations show a satisfactorily good match between asset allocation and correspondent risk profile. Specifically, Generalized Rachev ratios outperform in personalized allocation for “extreme” risk profiles, i.e. conservative and aggressive investors, whereas Sortino–Satchell and Farinelli–Tibiletti ratios for those that are more moderate. Sharpe ratio confirms its ability in constructing steady-diversified portfolios, although underperformed. |
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Keywords: | Risk management Decision support system Asset allocation |
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