Abstract
We aim to construct portfolios by employing different risk models and compare their performance in order to understand their appropriateness for effective portfolio management for investors. Mean variance (MV), semi variance (SV), mean absolute deviation (MaD) and conditional value at risk (CVaR) are considered as risk measures. The price data were extracted from the Pakistan stock exchange, Bombay stock exchange and Dhaka stock exchange under diverse economic conditions such as crisis, recovery and growth. We take the average of GDP of the selected period of each country as a cut-off point to make three economic scenarios. We use 40 stocks from the Pakistan stock exchange, 92 stocks from the Bombay stock exchange and 30 stocks from the Dhaka stock exchange. We compute optimal weights using global minimum variance portfolio (GMVP) for all stocks to construct optimal portfolios and analyze the data by using MV, SV, MaD and CVaR models for each subperiod. We find that CVaR (95%) gives better results in each scenario for all three countries and performance of portfolios is inconsistent in different scenarios.
Highlights
Portfolio construction is considered to be one of the main concerns in securities investment as the future returns are uncertain
The contribution of the paper is two-fold. (i) The outcome of the current study helps to identify if the same risk assessment is applicable in all three substituents or a different risk measure is required for a different sub period. (ii) It provides insights on asset choice, management and the use of an optimal risk model to estimate expected risk and return
If we summarize the results for the Pakistan stock exchange during the periods of crises, recovery and growth, it can be said that MCB made the highest proportion in optimal portfolio in the crisis period and in the case of recovery and growth, the highest proportion lies with PPL and OGDCL, respectively
Summary
Portfolio construction is considered to be one of the main concerns in securities investment as the future returns are uncertain. Portfolio selection is an ex-ant decision procedure. The risk is the possibility of deviation identified with the inconstancy of future returns (Artzner et al 1999). The role of proper risk management of a portfolio of financial assets or securities has been recognized in the literature. The concerns relate back to the era of Markowitz’s (1959) portfolio selection model which is the foundational framework of portfolio selection with optimal risk-return trade-off. The development of trading activities has provided new methods of underscoring the necessity for market participants to manage the risk
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