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Article
Publication date: 3 April 2017

Mourad Mroua, Fathi Abid and Wing Keung Wong

The purpose of this paper is to contribute to the literature in three ways: first, the authors investigate the impact of the sampling errors on optimal portfolio weights…

Abstract

Purpose

The purpose of this paper is to contribute to the literature in three ways: first, the authors investigate the impact of the sampling errors on optimal portfolio weights and on financial investment decision. Second, the authors advance a comparative analysis between various domestic and international diversification strategies to define a stochastic optimal choice. Third, the authors propose a new methodology combining the re-sampling method, stochastic optimization algorithm, and nonparametric stochastic dominance (SD) approach to analyze a stochastic optimal portfolio choice for risk-averse American investors who care about benefits of domestic diversification relative to international diversification. The authors propose a new portfolio optimization model involving SD constraints on the portfolio return rate. The authors define a portfolio with return dominating the benchmark portfolio return in the second-order stochastic dominance (SSD) and having maximum expected return. The authors combine re-sampling procedure and stochastic optimization to establish more flexibility in the investment decision rule.

Design/methodology/approach

The authors apply the re-sampling procedure to consider the sampling error in the optimization process. The authors try to resolve the problem of the stochastic optimal investment strategy choice using the nonparametric SD test by Linton et al. (2005) based on sub-sampling simulated p values. The authors apply the stochastic portfolio optimization algorithm with SSD constraints to define optimal diversified portfolios beating benchmark indices.

Findings

First, the authors find that reducing sampling error increases the dominance relationships between different portfolios, which, in turn, alters portfolio investment decisions. Though international diversification is preferred in some cases, the study’s results show that for risk-averse US investors, in general, there is no difference between the diversification strategies; this implies that there is no increase in the expected utility of international diversification for the period before and after the 2007-2008 financial crisis. Nevertheless, the authors find that stochastic diversification in domestic, global, and Europe, Australasia, and Far East markets delivers better risk returns for the US risk averters during the crisis period.

Originality/value

The originality of the idea in this paper is to introduce a new methodology combining the concept of portfolio re-sampling, stochastic portfolio optimization with SSD constraints, and the nonparametric SD test by Linton et al. (2005) based on subsampling simulated p values to analyze the impact of sampling errors on optimal portfolio returns and to investigate the problem of stochastic optimal choice between international and domestic diversification strategies. The authors try to prove more coherence in the portfolio choice with the stochastically and the uncertainty characters of the paper.

Details

American Journal of Business, vol. 32 no. 1
Type: Research Article
ISSN: 1935-5181

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Article
Publication date: 4 October 2019

A. Can Inci and Rachel Lagasse

This study investigates the role of cryptocurrencies in enhancing the performance of portfolios constructed from traditional asset classes. Using a long sample period…

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7248

Abstract

Purpose

This study investigates the role of cryptocurrencies in enhancing the performance of portfolios constructed from traditional asset classes. Using a long sample period covering not only the large value increases but also the dramatic declines during the beginning of 2018, the purpose of this paper is to provide a more complete analysis of the dynamic nature of cryptocurrencies as individual investment opportunities, and as components of optimal portfolios.

Design/methodology/approach

The mean-variance optimization technique of Merton (1990) is applied to develop the risk and return characteristics of the efficient portfolios, along with the optimal weights of the asset class components in the portfolios.

Findings

The authors provide evidence that as a single investment, the best cryptocurrency is Ripple, followed by Bitcoin and Litecoin. Furthermore, cryptocurrencies have a useful role in the optimal portfolio construction and in investments, in addition to their original purposes for which they were created. Bitcoin is the best cryptocurrency enhancing the characteristics of the optimal portfolio. Ripple and Litecoin follow in terms of their usefulness in an optimal portfolio as single cryptocurrencies. Including all these cryptocurrencies in a portfolio generates the best (most optimal) results. Contributions of the cryptocurrencies to the optimal portfolio evolve over time. Therefore, the results and conclusions of this study have no guarantee for continuation in an exact manner in the future. However, the increasing popularity and the unique characteristics of cryptocurrencies will assist their future presence in investment portfolios.

Originality/value

This is one of the first studies that examine the role of popular cryptocurrencies in enhancing a portfolio composed of traditional asset classes. The sample period is the largest that has been used in this strand of the literature, and allows to compare optimal portfolios in early/recent subsamples, and during the pre-/post-cryptocurrency crisis periods.

Details

Journal of Capital Markets Studies, vol. 3 no. 2
Type: Research Article
ISSN: 2514-4774

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Article
Publication date: 12 October 2012

Naima Lassoued and Ali Elmir

The purpose of this paper is to examine whether corporate governance has an impact on portfolio selection within the usual mean‐variance framework, the idea being that by

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2466

Abstract

Purpose

The purpose of this paper is to examine whether corporate governance has an impact on portfolio selection within the usual mean‐variance framework, the idea being that by reducing agency conflicts, corporate governance increases the value of the firm.

Design/methodology/approach

Using a sample of 460 American firms between 1995 and 2004, the authors first determine the optimal mean‐variance portfolio. The authors then test whether governance characteristics explain the optimal portfolio weights.

Findings

The results show that the optimal portfolio weights are sensitive to internal control mechanisms, ownership concentration, managerial entrenchment and incentive compensation.

Originality/value

The results are relevant to academicians and investors concerned with portfolio selection. In fact, they underline the importance of including governance characteristics in their portfolio selection.

Details

Corporate Governance: The international journal of business in society, vol. 12 no. 5
Type: Research Article
ISSN: 1472-0701

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Article
Publication date: 1 January 2001

Lixin Zeng

This article provides a general introduction to using catastrophe models to optimally manage the risk of a portfolio of Property & Casualty (P&C) liabilities. There is…

Abstract

This article provides a general introduction to using catastrophe models to optimally manage the risk of a portfolio of Property & Casualty (P&C) liabilities. There is increasing emphasis on the enterprise‐wide allocation of risk capacity for all financial intermediaries, e.g. banks, pensions, investment funds, as well as life and P&C insurers. The optionality (the skewness, kurtosis, and correlation with asset risk) of liability risks contribute substantially to earnings volatility. The severity of low‐probability events, i.e. natural catastrophes (e.g. hurricanes, earthquakes), combined with increases in geographic concentrations of wealth can adversely affect the diversification of the liability risk at the portfolio level. Since in both finance and insurance, optimally allocating risk at the portfolio level is generally based on (linear) combinations of nonlinear risks, finding an optimal allocation is not always tractable. The author describes a well‐established optimization algorithm and produces a reasonable approximation for an optimal solution.

Details

The Journal of Risk Finance, vol. 2 no. 2
Type: Research Article
ISSN: 1526-5943

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Article
Publication date: 10 April 2009

Shuping Wan

The purpose of this paper is to research the optimal portfolio proportion for the optimal investment model and the optimal consumption investment strategies for the optimal

Abstract

Purpose

The purpose of this paper is to research the optimal portfolio proportion for the optimal investment model and the optimal consumption investment strategies for the optimal consumption investment model under compound‐jump processes.

Design/methodology/approach

Traditionally, the price of risky security or asset is often modeled as geometric Brownian motion. However, the analysis of stock price evolution reveals sudden and rare breaks logically accounted for by exogenous events on information. It is natural to model such behavior by means of a point process, or, more simply, by a Poisson process, which has jumps of constant size occurring at rare and unpredictable intervals. Assume that the price of risky security stock is modeled by a compound‐jump process, the renew process theory is chosen to solve the optimal investment model, the HJB equation is chosen for the optimal consumption investment model.

Findings

Derive the analytical optimal portfolio proportion for the reduction model of optimal investment. The optimal consumption investment strategies are given by some equations for the optimal consumption investment model.

Research limitations/implications

Accessibility and availability of data are the main limitations which model will be applied.

Practical implications

The results obtained in this paper could be used as a guide to actual portfolio management.

Originality/value

The new approach for the optimal portfolio model under compound‐jump processes. The paper is aimed at actual portfolio managers.

Details

Kybernetes, vol. 38 no. 3/4
Type: Research Article
ISSN: 0368-492X

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Book part
Publication date: 11 August 2016

Karoll Gómez Portilla

This chapter focuses on examining how changes in the liquidity differential between nominal and TIPS yields influence optimal portfolio allocations in U.S. Treasury…

Abstract

This chapter focuses on examining how changes in the liquidity differential between nominal and TIPS yields influence optimal portfolio allocations in U.S. Treasury securities. Based on a nonparametric estimation technique and comparing the optimal allocation decisions of mean-variance and CRRA investor, when investment opportunities are time varying, I present evidence that liquidity risk premium is a significant risk-factor in a portfolio allocation context. In fact, I find that a conditional allocation strategy translates into improved in-sample and out-of-sample asset allocation and performance. The analysis of the portfolio allocation to U.S. government bonds is particularly important for central banks, specially in developing countries, given the fact that, collectively they have accumulate a large holdings of U.S. securities over the last 15 years.

Details

The Spread of Financial Sophistication through Emerging Markets Worldwide
Type: Book
ISBN: 978-1-78635-155-5

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Article
Publication date: 13 August 2019

Wajdi Hamma, Bassem Salhi, Ahmed Ghorbel and Anis Jarboui

The purpose of this paper is to analyze the optimal hedging strategy of the oil-stock dependence structure.

Abstract

Purpose

The purpose of this paper is to analyze the optimal hedging strategy of the oil-stock dependence structure.

Design/methodology/approach

The methodology consists to model the data over the daily period spanning from January 02, 2002 to May 19, 2016 by a various copula functions to better modeling the dependence between crude oil market and stock markets, and to use dependence coefficients and conditional variance to calculate optimal portfolio weights and optimal hedge ratios, and to suggest the best hedging strategy for oil-stock portfolio.

Findings

The findings show that the Gumbel copula is the best model for modeling the conditional dependence structure of the oil and stock markets in most cases. They also indicate that the best hedging strategy for oil price by stock market varies considerably over time, but this variation depends on both the index introduced and the model used. However, the conditional copula method with skewed student more effective than the other models to minimize the risk of oil-stock portfolio.

Originality/value

This research implication can be valuable for portfolio managers and individual investors who seek to make earnings by diversifying their portfolios. The findings of this study provide evidence of the importance of stock assets for making an optimal portfolio consisting of oil in the case of investments in oil and stock markets. This paper attempts to fill the voids in the literature on volatility among oil prices and stock markets in two important areas. First, it uses copulas to investigate the conditional dependence structure of the oil crude and stock markets in the oil exporting and importing countries. Second, it uses the dependence coefficients and conditional variance to calculate dynamic hedge ratios and risk-minimizing optimal portfolio weights for oil–stock.

Details

International Journal of Energy Sector Management, vol. 14 no. 2
Type: Research Article
ISSN: 1750-6220

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Book part
Publication date: 27 February 2009

Manuel Tarrazo

In this study, we analyze the power of the individual return-to-volatility security performance heuristic (ri/stdi) to simplify the identification of securities to buy…

Abstract

In this study, we analyze the power of the individual return-to-volatility security performance heuristic (ri/stdi) to simplify the identification of securities to buy and, consequently, to form the optimal no short sales mean–variance portfolios. The heuristic ri/stdi is powerful enough to identify the long and shorts sets. This is due to the positive definiteness of the variance–covariance matrix – the key is to use the heuristic sequentially. At the investor level, the heuristic helps investors to decide what securities to consider first. At the portfolio level, the heuristic may help us find out whether it is a good idea to invest in equity to begin with. Our research may also help to integrate individual security analysis into portfolio optimization through improved security rankings.

Details

Research in Finance
Type: Book
ISBN: 978-1-84855-447-4

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Article
Publication date: 24 August 2020

Fabio Filipozzi and Kersti Harkmann

This paper aims to investigate the efficiency of different hedging strategies for an investor holding a portfolio of foreign currency bonds.

Abstract

Purpose

This paper aims to investigate the efficiency of different hedging strategies for an investor holding a portfolio of foreign currency bonds.

Design/methodology/approach

The simplest strategies of no hedge and fully hedged are compared with the more sophisticated strategies of the ordinary least squares (OLS) approach and the optimal hedge ratios found by the dynamic conditional correlation-generalised autoregressive conditional heteroskedasticity approach.

Findings

The sophisticated hedging strategies are found to be superior to the simple strategies because they lower the portfolio risk in domestic currency terms and improve the Sharpe ratios for multi-asset portfolios. The analyses also show that both the OLS and dynamic hedging strategies imply holding a limited carry position by being long in high-yielding currencies but short in low-yielding currencies.

Originality/value

The performance of multi-currency portfolios is examined using more realistic assumptions than in the previous literature, including a weekly frequency and a constraint of no short selling. Furthermore, carry trades are shown to be part of an optimal portfolio.

Details

Review of Accounting and Finance, vol. 19 no. 3
Type: Research Article
ISSN: 1475-7702

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Article
Publication date: 1 March 2006

Stanley McGreal, Alastair Adair, James N. Berry and James R. Webb

Few countries have sufficiently long and detailed returns data for real estate to permit sophisticated analysis. This paper aims to examine the potential diversification…

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2045

Abstract

Purpose

Few countries have sufficiently long and detailed returns data for real estate to permit sophisticated analysis. This paper aims to examine the potential diversification of private real estate investments using returns data for major regional centres in Ireland and the UK.

Design/methodology/approach

Optimal real estate‐only portfolios are constructed using total returns, income returns and appreciation returns for office and retail real estate in ten cities within Ireland and the UK. The analysis uses IPD data for the period 1984 to 2002. Total return, income return and appreciation returns are treated as separate asset streams in the modelling of portfolios.

Findings

The results show different risk levels; in particular the income stream carries low risk, whereas the capital appreciation element is much more volatile and risky. Optimal portfolios, office or retail, whether income, appreciation or total returns, indicate that provincial markets perform well and are capable of pushing London out of the optimised portfolios.

Research limitations/implications

Limitations stem from the optimal portfolios being based on return series without a consideration of market depth. Future research will seek to construct weighted portfolios.

Originality/value

The paper constructs optimal portfolios for three scenarios: low return; medium return; and high return across sectors, return streams and major regional centres in Ireland and the UK. The results show that regional centres perform well and can exclude London real estate from optimal portfolios.

Details

Journal of Property Investment & Finance, vol. 24 no. 2
Type: Research Article
ISSN: 1463-578X

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