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International Letters of Chemistry, Physics and Astronomy
ILCPA Volume 53
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Portfolio Optimization Using Conditional Sharpe Ratio
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Portfolio Optimization Using Conditional Sharpe Ratio

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Abstract:

In this paper we propose a portfolio optimization model that selects the portfolio with the largest worse-case-scenario sharpe ratio with a given confidence level. We highlight the relationship between conditional value-atrisk based sharpe ratio and standard deviation based sharpe ratio proposed in literature. By utilizing the results of Rockafellar and Uryasev [5], we evaluate conditional value- at- risk for each portfolio. Our model is expected to enlarge the application area of practical investment problems for which the original sharpe ratio is not suitable, however should device effective computational methods to solve optimal portfolio selection problems with large number of investment opportunities. Here conditional sharpe ratio is defined as the ratio of expected excess return to the expected shortfall. This optimization considers both risk and return, of which changes will effect the sharpe ratio. That is the fitness function for dynamic portfolio is the objective function of the model.

Info:

Periodical:
International Letters of Chemistry, Physics and Astronomy (Volume 53)
Pages:
130-136
DOI:
https://doi.org/10.18052/www.scipress.com/ILCPA.53.130
Citation:
M. Baweja et al., "Portfolio Optimization Using Conditional Sharpe Ratio", International Letters of Chemistry, Physics and Astronomy, Vol. 53, pp. 130-136, 2015
Online since:
July 2015
Authors:
Meena Baweja, Ratnesh R. Saxena, Deepak Sehgal
Keywords:
Conditional Value-at-Risk, Portfolio Optimization, Sharpe Ratio
Export:
RIS, BibTeX, Text
Distribution:
Open Access

Creative Commons License
This work is licensed under a
Creative Commons Attribution 4.0 International License

References:

[1] P. Artzner, F. Delbaen, J.M. Eber, D. Heath, Coherent Measures of Risk, Mathematical Finance, 9, 203-228 (1999).

DOI: https://doi.org/10.1111/1467-9965.00068

[2] H.M. Markowitz, Portfolio Selection, Journal of Finance, 7(1), 77–91 (1952).

[3] L. Martinelli, K. Simsek, F. Goltz, Structured forms of investment strategies in institutional investors' portfolios, EDHEC Risk and Asset Management Research Centre, April (2005).

[4] R.T. Rockafellar, S. Uryasev, Optimization of Conditional Value-at-Risk, Journal of Risk, 2, 21-41 (2000).

[5] R.T. Rockafellar, S. Uryasev, Conditional Value-at-Risk for General Loss Distributions, Research Report 2001-5, ISE Dept., University of Florida, April, (2001).

[6] Sharpe, William F., The Sharpe Ratio, Journal of Portfolio Management, Fall, 49–58 (1994).

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Cited By:

[1] G. Frahm, F. Huber, "The Outperformance Probability of Mutual Funds", Journal of Risk and Financial Management, Vol. 12, p. 108, 2019

DOI: https://doi.org/10.3390/jrfm12030108