CVaR portfolio-optimization vs. utility maximization..
John Sepp?nen wrote:
Hi all! My question itself is not related to R so my apologies for that. I ran scenario optimizations in S-Plus with respect to variance and CVaR as a risk measures (based on Scherer & Martin's (2005) book). My assets where mostly negatively skewed and fat-tailed and I expected the resulting portfolio from CVaR-optimization to have less tail-risk than the the portfolio from variance-optimization. However, I noticed the opposite which is surpirising because the markowitz optimization is often accused of being tail-risk maximization when assets are negatively skewed (e.g. hedge funds). In many sources CVaR is said to be "the measure" for downside risk measurement. However, I am not able to find a discussion about how well CVaR relates with the utility maximization framework.. who should optimize with respect to CVaR if it increases the tail-risk? Computational easiness is not a good reason.. Any references or thoughts about the subject would be appreciated..
Use modified CVaR instead. It handles non-normal distributions. And, being an *R* finance list, all that functionality is already available in R, including optimizing using modified CVaR as one of your objectives. Cheers, - Brian
Brian G. Peterson http://braverock.com/brian/ Ph: 773-459-4973 IM: bgpbraverock