Most investors are happy when their returns are above average, but not so happy when they are
Question:
Most investors are happy when their returns are "above average," but not so happy when they are "below average." In the Markowitz portfolio optimization problem given by equations (8.10) through (8.19), the objective function is to minimize variance, which is given by
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where Rs is the portfolio return under scenario s and R is the expected or average return of the portfolio. With this objective function, we are choosing a portfolio that minimizes deviations both above and below the average, RÌ…. However, most investors are happy when Rs > RÌ…, but unhappy when RsLet Dsp - Dsn = Rs - RÌ…, and restrict Dsp and Dsn to be nonnegative. Then Dsp measures the positive deviation from the mean return in scenario s (i.e., Dsp = Rs - RÌ… when Rs.Reformulate the Markowitz portfolio optimization model given in equations (8.10) through (8.19) to use semivariance in the objective function. Solve the model using either Excel Solver or LINGO.
PortfolioA portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly...
Step by Step Answer:
In order to measure the semivariance it is necessary to measure only the downside deviation below the mean Do this by introducing two new variables fo...View the full answer
An Introduction to Management Science Quantitative Approaches to Decision Making
ISBN: 978-1111823610
14th edition
Authors: David R. Anderson, Dennis J. Sweeney, Thomas A. Williams, Jeffrey D. Camm, James J. Cochran
