Abstract
The development of asset pricing model is attributed to Markowitz (1952) which initiated towards Modern Portfolio Theory (MPT). The whole concept of MPT based on normality of returns assumption but in emerging economies volatility of returns is an important issue and sometimes markets only behave in either bullish or bearish patterns. Moreover, the volatility cannot be attributed and explained by variance rather it can be a result of extreme events (profits / losses) referred to as none elliptical distributions of returns. The objective of this study is to incorporate additional dimensions of risk in Markowitz Mean-Variance framework through inclusions of skewness kurtosis and coherent risk measure CVaR to obtain optimal portfolio with PGP approach. The study analyzes the portfolio returns of Mean-Variance (MV), Mean Variance Skewness (MVS), Mean Variance Skewness Kurtosis (MVSK) & Mean CVaR Skewness Kurtosis (MCVaRSK) models by using selected stocks of KSE-100 index over the time period of 2009-2018. The empirical findings suggest that portfolio returns impacted through inclusion of higher moments and CVaR and generated higher returns over the benchmark portfolio. The results of study are immensely useful for the fund managers and investors for stocks selection and construction of alternative portfolios. Keywords: Portfolio optimization, Mean CVaR Skewness Kurtosis, Multi objective optimization, Pakistan JEL Classifications: C61, G10, G11 DOI: https://doi.org/10.32479/ijefi.10351
Highlights
The stock market in any country plays a significant role in economic development through saving mobilization
In the world of investment and finance this whole idea is attributed to the Markowitz (1952) “mean variance frame work” which leads towards Modern Portfolio Theory based on fundamental concept of tradeoff between risk and return
The test results showed that 82% of the stocks are non-normal which gives an importance of inclusion of higher order moments in Pakistan Stock exchange
Summary
The stock market in any country plays a significant role in economic development through saving mobilization. In order to optimal allocation of funds in stocks diversification is key, for the investors it is all about “Don’t put all your eggs in one basket” the objective of diversification is to optimally select asset for the construction of portfolio aiming at possible reduction in risk to get maximum return. In existence of phenomena of normative theory investors are risk aversive and there only preference is to maximize expected returns, whereby the risk is measured through variance covariance of assets. Over the years this model is widely used in investment industry for optimal allocation of assets and construction of portfolios. One of the most important assumption of Markowitz mean variance frame work is the normality of returns which emphasizes that only mean and
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