[R-SIG-Finance] CVaR portfolio-optimization vs. utility maximization..

[Brian G. Peterson]

John Seppänen 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