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Asset allocation and downside risk

Joel R. Barber

International Journal of Portfolio Analysis and Management2021https://doi.org/10.1504/ijpam.2021.115662article
ABDC B
Weight
0.26

Abstract

Economists have long recognised that investors care more about downside risk than total variation, which includes upside gains. This paper develops a new technique, along the lines of Sharpe's (1990, 1992) asset-class model, to measure the performance of an actively managed portfolio with respect to downside risk. The new technique involves choosing a multiple asset-class benchmark with the highest possible correlation with the active strategy return subject to the constraint that the risks are the same. The risk-matched portfolio can be used to measure the performance of an active portfolio with respect to downside risk. Because, by construction the risk of the benchmark is the same as the active portfolio, it is a simple matter to compare the performance of the active to the benchmark using the Sortino ratio. To illustrate the new technique, we compare the performance of exchange traded funds that track S&P equal-weighted and value weighed sector indexes.

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https://doi.org/https://doi.org/10.1504/ijpam.2021.115662

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@article{joel2021,
  title        = {{Asset allocation and downside risk}},
  author       = {Joel R. Barber},
  journal      = {International Journal of Portfolio Analysis and Management},
  year         = {2021},
  doi          = {https://doi.org/https://doi.org/10.1504/ijpam.2021.115662},
}

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Evidence weight

0.26

Balanced mode · F 0.40 / M 0.15 / V 0.05 / R 0.40

F · citation impact0.00 × 0.4 = 0.00
M · momentum0.20 × 0.15 = 0.03
V · venue signal0.50 × 0.05 = 0.03
R · text relevance †0.50 × 0.4 = 0.20

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