Safety-first portfolio optimization for US investors in emerging global, Asian and Latin American markets

Abstract

Risk averse US investors with safety-first objectives in portfolio optimization hold small weights (maximum 10%) in emerging markets when constructing portfolios of the Standard and Poor's 500 (SP), and the Emerging Markets Composite Global (CG), Asia (AS) and Latin American (LA) indexes, respectively. The Composite Global and Asia weights are even smaller than their minimum variance weights. Yet, these optimal safety-first portfolios are dominant in terms of risk and return over the global minimum or higher variance portfolios. In contrast, safety-first optimization for Latin America is hardly different from the minimum variance and not clearly dominant over other mean–variance portfolios. Overall, safety-first limits portfolio losses associated with infrequent catastrophic events and otherwise optimize performance.