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How's the performance of the optimized portfolios by safety-first rules: Theory with empirical comparisons

How's the performance of the optimized portfolios by safety-first rules: Theory with empirical comparisons
How's the performance of the optimized portfolios by safety-first rules: Theory with empirical comparisons
Safety-first (SF) rules have been increasingly useful in particular for construction of optimal portfolios related to pension and other social insurance funds. How's the performance of the optimal portfolios constructed by different SF rules is an interesting practical question but yet less investigated theoretically. In this paper, we therefore analytically investigate the properties of the risky portfolios constructed by the three popular SF rules, denoted by the RSF, TSF and KSF, which are suggested and developed by A. D. Roy,L. G. Telser and S. Kataoka, respectively. Using Sharpe ratio as a measure of portfolio performance, we theoretically derive that the performance of an optimal portfolio constructed by the KSF approach depends on an acceptable level of extreme risk tolerance. The unique solution where the performance of the KSF portfolio is the same as that of the other two SF portfolios is found. By this we interestingly find that except this special case, under the finite optimal portfolios existent, the KSF portfolio always dominates the TSF portfolio in terms of the Sharpe ratio. In addition, in some market scenarios,even when the RSF and TSF portfolios do not exist in finite forms, the KSF rule can still apply to get a finite optimal portfolio. Moreover, in comparison with the RSF rule, a series of finite KSF portfolios can be interestingly constructed with their Sharpe ratios approaching to the maximum Sharpe ratio,which however cannot be reached by any corresponding finite RSF portfolio.Numerical comparisons of these rules by using a set of real data are further empirically demonstrated.
1547-5816
Ding, Yuanyao
a7bd2319-16e3-4653-809e-affab6b82f58
Lu, Zudi
4aa7d988-ac2b-4150-a586-ca92b8adda95
Ding, Yuanyao
a7bd2319-16e3-4653-809e-affab6b82f58
Lu, Zudi
4aa7d988-ac2b-4150-a586-ca92b8adda95

Ding, Yuanyao and Lu, Zudi (2019) How's the performance of the optimized portfolios by safety-first rules: Theory with empirical comparisons. Journal of Industrial and Management Optimization. (In Press)

Record type: Article

Abstract

Safety-first (SF) rules have been increasingly useful in particular for construction of optimal portfolios related to pension and other social insurance funds. How's the performance of the optimal portfolios constructed by different SF rules is an interesting practical question but yet less investigated theoretically. In this paper, we therefore analytically investigate the properties of the risky portfolios constructed by the three popular SF rules, denoted by the RSF, TSF and KSF, which are suggested and developed by A. D. Roy,L. G. Telser and S. Kataoka, respectively. Using Sharpe ratio as a measure of portfolio performance, we theoretically derive that the performance of an optimal portfolio constructed by the KSF approach depends on an acceptable level of extreme risk tolerance. The unique solution where the performance of the KSF portfolio is the same as that of the other two SF portfolios is found. By this we interestingly find that except this special case, under the finite optimal portfolios existent, the KSF portfolio always dominates the TSF portfolio in terms of the Sharpe ratio. In addition, in some market scenarios,even when the RSF and TSF portfolios do not exist in finite forms, the KSF rule can still apply to get a finite optimal portfolio. Moreover, in comparison with the RSF rule, a series of finite KSF portfolios can be interestingly constructed with their Sharpe ratios approaching to the maximum Sharpe ratio,which however cannot be reached by any corresponding finite RSF portfolio.Numerical comparisons of these rules by using a set of real data are further empirically demonstrated.

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Accepted/In Press date: 28 February 2019

Identifiers

Local EPrints ID: 429179
URI: https://eprints.soton.ac.uk/id/eprint/429179
ISSN: 1547-5816
PURE UUID: 77d458bf-5a22-4ddc-a882-106c3a3e1bd9
ORCID for Zudi Lu: ORCID iD orcid.org/0000-0003-0893-832X

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Date deposited: 22 Mar 2019 17:30
Last modified: 13 Jun 2019 00:31

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Contributors

Author: Yuanyao Ding
Author: Zudi Lu ORCID iD

University divisions

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