Portfolio selection using the Riskiness Index

Abstract

Purpose

The purpose of this paper is to increase the accuracy of the efficient portfolios frontier and the capital market line using the Riskiness Index.

Design/methodology/approach

This paper will develop the mean-riskiness model for portfolio selection using the Riskiness Index.

Findings

This paper’s main result is establishing a mean-riskiness efficient set of portfolios. In addition, the paper presents two applications for the mean-riskiness portfolio management method: one that is based on the multi-normal distribution (which is identical to the MV model optimal portfolio) and one that is based on the multi-normal inverse Gaussian distribution (which increases the portfolio’s accuracy, as it includes the a-symmetry and tail-heaviness features in addition to the scale and diversification features of the MV model).

Research limitations/implications

The Riskiness Index is not a coherent measurement of financial risk, and the mean-riskiness model application is based on a high-order approximation to the portfolio’s rate of return distribution.

Originality/value

The mean-riskiness model increases portfolio management accuracy using the Riskiness Index. As the approximation order increases, the portfolio’s accuracy increases as well. This result can lead to a more efficient asset allocation in the capital markets.

Citation

Nisani, D. (2018), "Portfolio selection using the Riskiness Index", Studies in Economics and Finance, Vol. 35 No. 2, pp. 330-339. https://doi.org/10.1108/SEF-03-2017-0058