Optimal asset allocation aid system: From “one-size” vs “tailor-made” performance ratio

Abstract

Optimal asset allocation well-fitting investors’ goals is a pressing challenge in risk management. Making a step forward to the Sharpe ratio, the parameter-dependent Sortino–Satchell, Generalized Rachev and Farinelli–Tibiletti performance ratios are suggested for personalizing asset allocation. Tailor-made optimal asset paths for five different investor risk profiles are traced over a rolling 12 month investing horizon. Our simulations show a satisfactorily good match between asset allocation and correspondent risk profile. Specifically, Generalized Rachev ratios outperform in personalized allocation for “extreme” risk profiles, i.e. conservative and aggressive investors, whereas Sortino–Satchell and Farinelli–Tibiletti ratios for those that are more moderate. Sharpe ratio confirms its ability in constructing steady-diversified portfolios, although underperformed.