Risk-return Ratio Research Articles

The Role of Sex in the Assessment of Return and Downside Risk in Decumulation Financial Planning

This paper aims to assess the return and downside risk of a decumulation portfolio established at the retirement age of a senior, with a determined lifetime horizon differentiated by the sex of the citizen. To measure the portfolio’s return and downside risk, two ratios conditioned by seniors’ risk attitude towards portfolio failure are employed: the downside Sortino ratio and the downside risk–return ratio. Unlike other research in the field, this manuscript provides three portfolio compositions catering to different senior investment profiles: aggressive, moderate, and conservative. Additionally, it offers a decumulation horizon conditioned by the sex-specific life expectancy of the individual, instead of offering different scenarios for conducting a sensitivity analysis. Lastly, this study was conducted across three socioeconomically distinct countries: the US, Spain, and Japan. The results clearly demonstrate that both sex and nationality significantly influence the selection of the optimal decumulation portfolio composition aimed at exhausting funds by the senior’s demise.

Research on Tail Risk Hedging in the Digital Asset Market

In recent years, the digital asset market has experienced rapid growth, but at the same time, its implicit tail risks have gradually raised concerns, especially amidst the global economic downturn caused by the pandemic. This paper aims to study tail risks and propose hedging strategies. Based on the GARCH and VaR models, this paper uses weekly return data from July 2017 to December 2021 for Bitcoin digital cryptocurrency and traditional non-digital asset market indices such as stocks, bonds, gold, and commodities. Utilizing EViews and Excel, the study explores tail risk measurement and portfolio diversification effects in the digital asset market. The main findings are as follows: (1) During the sample period, cryptocurrency returns exhibited significant volatility, with weak correlations with returns from traditional non-digital assets. Further analysis revealed strong hedging effects of digital assets against the bond market but weaker effects against the gold and stock markets, as well as commodity markets; (2) Cryptocurrency in traditional investment portfolios can enhance the risk-return ratio by adding it to the asset mix.

Economic sustainability for developing a less polluting eucalyptus-charcoal productive system in emerging markets

Charcoal plays a relevant role in developing countries, with potential to contribute to the energy needs as a cheaper and carbon-friendly alternative. In Brazil, eucalyptus-charcoal has gained attention as an input for metal-steel industries, mostly supplied by small and medium forest producers. Those commonly use rudimentary charcoal-kilns, characterized by higher greenhouse gas (GHG) emissions, reduced productivity and economically unsustainable impacted by their reduced financial management. In order to fulfill this gap, a simplified financial planning model and an economic analysis of a less polluting charcoal productive system, called kilns-furnace system, were performed, also comparing to traditional charcoal-kilns. A differentiated cost of capital pricing model was also proposed, adjusted to bioenergy projects in emerging markets. Results showed that kilns-furnace system presented the best financial indicators, with greater free cash flow capacity, shorter reimbursement period, reduced charcoal production cost, better return on invested capital and a financial resilience even under pessimistic conditions. With its risk-return ratio verified, kilns-furnace larger insertion may be an attraction for charcoal producers, with probable increased long-term economic sustainability when compared to traditional kilns. The proposed cost of capital pricing model opened a new perspective for its calculation in developing countries, and should be used by producers, companies, and government in investment decision and as a guidance for financing lines.

Проблемы диверсификации активов в условиях высокой волатильности финансовых рынков

The article analyzes the main strategies for constructing an investment portfolio and provides recommendations for optimizing the risk-return ratio of the portfolio by selecting the appropriate investment proportions for each asset based on the theory of G. Markowitz using Excel. The author of the article examined in detail the main advantages and disadvantages of strategies for allocating investor funds within the investment portfolio. Based on the analysis carried out, the author of the article gave recommendations on the selection of financial assets for the of investment portfolio design depending on the cycle of economic activity.

An Assessment in Terms of Investment Efficiency in an Informal Economy. A Case Study with 30 Years Biased Data from Albanian Forex Market

While observing the charts of the foreign exchange market in Albania, it is evident that the market in Albania is less dynamic than the market in the region. The financial system in Albania needs more information to build strategies, for there is a lack of financial transparency. It is a controlled financial system to a certain extent. Most banks contribute to the market, as do financial companies, individual speculators, and import-export companies. By examining these charts, one can discern the fractal and repetitive patterns within the behavior of the financial market. Empirical evidence indicates a notable interdependence and correlation between price movements. This paper empirically explores the possibilities of investing with an efficient risk-return ratio using the data from the Bank of Albania. This analysis presents an approach to portfolio theory while working with biased data in an informal economy. It addresses the question of which asset investments are efficient for the informal economy in Albania over a span of 30 years. The analysis encompasses nine different assets are considered for the analysis: USDALL, GBPALL, CHFALL, EURALL, XAUALL, XAGALL, JPYALL, AUDALL, and CADALL.

IMPROVING APPROACHES TO THE DIVERSIFICATION OF THE SECURITIES PORTFOLIO BY COUNTRY FOR RUSSIAN INVESTORS

The paper presents an approach to the formation of an investment portfolio that includes securities of various countries. The study is closely related to the portfolio theory of G. Markowitz, who believed that the created portfolio should consist only of optimally selected assets with the necessary risk-return ratio for the investor. Reducing the risk level of the securities portfolio is possible due to its diversification by country. The authors refer to the data of the authoritative analytical financial company MSCI, which for more than half a century has been compiling and publishing indices covering many stock markets of the world. The paper presented the classification of MSCI country indices for three types of markets, as well as calculated the risks for each of them. As a measure of risk, the authors use the standard deviation. The last stage of the study involves the construction of correlation matrices to determine the smallest relationship between the considered indices. Further, based on the correlation analysis, the authors identified 'friendly' countries for the formation of an investment portfolio with minimal risk. They form a portfolio with less risk than the risk of individual indices that make it up. The approach considered in the paper may become relevant in 2023 when the Central Bank of the Russian Federation expands the list of countries whose shares are available to Russian investors.

Portfolio instability and socially responsible investment: Experiments with financial professionals and students

Efficiency of SRI portfolios is commonly assessed based on an inconclusive risk-return ratio. We propose to approach the efficiency of portfolios with the notion of instability. Unstable portfolios are characterized by higher transaction costs and human resources costs that justify search for more stable portfolios. We examine the instability of SRI portfolios from the perspective of behavioral finance. Based on data from incentivized experiments with 153 financial professionals and 233 students, we compare a baseline treatment to a ranking treatment in which participants received feedback regarding their average investment in SRI assets. We found that SRI portfolios had significantly lower instability: portfolios with a majority of SRI shares exhibited less instability in both treatments compared to conventional portfolios. Moreover, in the ranking treatment subjects invested more in SRI assets than in the baseline. In addition, the experiment revealed the convergence of professionals’ and students’ behavioral patterns.

Can the commodity futures be used as effective diversifiers for pension funds investment portfolios? A literature review

We examine from theoretical point of view whether commodity futures can produce diversification benefits for the pension funds’ investment portfolios. These asset tools have been classified in the alternative investments and as a result they are subjected to worldwide pension regulative restrictions. Reviewing the relative scientific literature of pension funds’ investment strategy and risk management, there is evidence that pension funds’ trustees might take advantage of commodity futures preference, mainly because of their a) returns’ low or negative correlation with these of other traditional options (bonds and stocks) and b) hedging positive properties against the inflation risk, resulting in the optimization of portfolios’ risk-return ratio. 
 JEL Classifications: G23, Q02.
 Key words: Pension funds, Risk Diversification, Alternative Assets, Commodity Futures

Financial recommendations on Reddit, stock returns and cumulative prospect theory

This study investigates stock recommendations from the three largest finance subreddits on Reddit: wallstreetbets, investing and stocks. A simple strategy that buys recommended stocks weighted by the number of posts per day yields a portfolio with higher average returns at the expense of higher risks than the market for all holding periods, i.e., unfavorable Sharpe ratios. Furthermore, the strategy leads to positive (insignificant) short-term and negative (significant) long-term alphas when considering common risk factors. This is consistent with the idea of “meme stocks”, meaning that the recommended stocks are artificially inflated in the short term when they are recommended, and that the posts contain no information about long-term success. However, it is likely that Reddit users, especially on the subreddit wallstreetbets, have preferences for bets which are not captured by the mean–variance framework. Therefore, we draw on cumulative prospect theory (CPT). We find that the CPT-valuations of the Reddit portfolio exceed those of the market, which may explain the persistent attractiveness for investors to follow social media stock recommendations despite the unfavorable risk-return ratio.

RISK, RETURN AND INTERNATIONAL PORTFOLIO DIVERSIFICATION: K-MEANS CLUSTERING DATA

The work is devoted to the study of the international investment portfolio, its features such as risk, profitability and the level of international diversification, as well as global flows of portfolio investments. The methodology of the work is as follows. The paper develops k-means clustering model to study the patterns of global portfolio investment flows and equity markets. The model groups 30 developed and emerging stock markets according to three variables: return, risk and the level of international diversification. Thus, the main purpose of this paper is to investigate different stock markets on a global scale through an in-depth analysis of the respective market portfolios and their measures of risk, return and international diversification, as well as their interrelationships. The researcher develops and builds the model in such a way as to either confirm or refute the hypotheses put forward. The results of the study demonstrate the following results, which present opportunities for further research. The study supports the hypothesis that portfolios of investors from developed stock markets have a better level of international diversification than portfolios of investors from emerging stock markets. However, there is high within-group variation in the levels of international diversification among developed markets. There are three groups of developed markets based on the level of international diversification of investors in their respective markets: low-level markets (ca. 22%); mid-level markets (43%); and high-level markets (ca. 61%), while emerging markets are generally more heterogeneous. The hypothesis that stock markets that are domestic to investors with higher levels of international diversification have higher rates of return and lower rates of risk has not been confirmed. In general, developed stock markets are characterized by higher returns and international diversification with lower risk ratios. Nevertheless, the higher level of international diversification in developed market portfolios is not always accompanied by better stock performance. The best risk-return ratio (return – 0.46%, risk – 5.56%) is observed for markets from the cluster with an average level of international diversification. While the markets in the cluster with the highest level of international diversification have unreasonably high-risk ratios, which are not compensated by better returns. Markets in the cluster with lower levels of international diversification have unreasonably low rates of return that are not accompanied by correspondingly lower risks.

Attracting venture capital to help early-stage, radical cleantech ventures bridge the valley of death: 27 levers to influence the investor perceived risk-return ratio

Cleantech ventures working on radical hardware-, material-, and chemical-based innovations have a particularly high potential to disrupt currently unsustainable production and consumption systems. Such ventures, however, typically have long development times with high risk and high capital demand, and consequently have difficulties securing sufficient capital to bridge the “valley of death” between basic research and commercialization. Extant research has explored a great variety of success factors for cleantech ventures, but have not provided sufficient resolution on levers for action that can positively influence the investor perceived risk return ratio when considering investments in early-stage, radical cleantech ventures. With a mixed-methods approach, we analyze investment decisions from 45 of the most prominent, early-stage cleantech investors and venture-investing experts in the EU and the USA. Using ex-post analysis of past investment decisions, we analyzed factors that have previously influenced investor decision making, which we then used to extract 27 levers that can either derisk or increase the return of investments in radical, cleantech ventures. We further validated these 27 levers by presenting them to investors, linked to an ex-ante, standardized investment scenario. This allowed us to gather the first data on the relative effectiveness of these levers. The article's contribution to theory is the development of a multi-actor confluence framework – the “who, what, and how” of influencing investor perceived risk-return ratio for early-stage, radical cleantech investments. The main contribution to practice is a “hands-on overview” for implementing these levers to accelerate capital deployment for cleantech innovation.

Multi-step optimization of the purchasing options of power retailers to feed their portfolios of consumers

The liberalization of the retail market of electricity increased the tariff choice of end-use consumers. Retailers compete in the retail market for customers, obtaining private portfolios of end-use consumers to manage. Retailers buy electricity at wholesale markets to feed their customers’ demands. They can use spot, derivatives, and bilateral markets to acquire the energy they need. The increasing levels of variable renewable energy sources trading at spot markets, increase the price volatility of these markets. To hedge against the volatility of spot prices, retailers may negotiate standard physical or financial bilateral contracts at derivatives markets. Alternatively, they can also negotiate private bilateral contracts. This article addresses the optimization of the retailers purchasing options, to increase their risk-return ratio from electricity markets, and offer more competitive tariffs to consumers. Considering the risk attitude of retailers, they use a multi-step purchasing model composed of a multi-level risk-return optimization and a decision support system. The article presents an agent-based study considering a retailer with a portfolio of 312 real-world consumers. Risk-seeking and risk-neutral retailers obtained a return up to 38%, less than 7% of the optimal return. However, risk-neutral retailers are subject to four times higher risk in their returns than risk-seeking retailers. The results support the conclusion that wholesale markets of electricity are more favourable to risk-seeking retailers, considering their real returns.

Ex ante assessment of sustainable marketing investments

The sustainability revolution, and the positive effects of sustainable marketing on business performance, should lead companies and research to focus more on issues related to assessment of sustainable marketing investments. This conceptual paper is an attempt to provide a contribution on this interdisciplinary topic not yet considered in the literature. We focus on how companies can assess ex ante this type of investment. We propose an adaptation of the risk-return ratio as a tool for ex ante assessment of sustainable marketing investments. We also provide considerations about the risks and rewards of Starbucks’ “Greneer Stores” project. We conclude the study by discussing the implications for managers of sustainable companies.

Social conscious investment: analysis of the impact of COVID-19 based on ETF

The paper examines the risk-return ratio of the ESG ETF as a basis for developing an investment strategy that has become necessary due to the shock caused by the COVID-19 pandemic. ESG Investing is taking into account environmental, sociological and governance factors along with financial factors when making investment decisions. ETF Investing means an index fund whose shares are traded on an exchange. Research has shown that almost 75% of respondents around the world integrate ESG and ETF into their investment approach. The ESG segment demonstrates an increase in investment attractiveness mainly due to the assumption of sustainability. Therefore, the hypothesis of stability in the shock period was a prerequisite for our study. One of the methods used was comparative analysis. Different approaches to risk assessment helped to analyze each group along with the expected return. Among the basic concepts of measuring financial risks in the theory of expected utility, the concept of variability, the concept of sensitivity and the concept of losses in adverse situations, the study focuses on identifying variability and assessing losses in adverse situations. The results were evaluated and compared before and after the shock. This paper also studied a pair of indicators characterizing the shock period, namely the depth of shock and the level of recovery to assess the risk-return ratio directly in the shock period. The results showed differences in risk assessments. The main overall consequence is that ESG ETFs are likely to be affected by shocks, but in the post-shock period there is a fairly rapid recovery. Applying risk-return analysis methodologies, we came to the following conclusions: ETFs show an increase in risks, the pandemic did not change catastrophically, which contributed to a rapid recovery. The study has shown that the dynamics of the risk-return ratio for investments with high implementation of the principle of E, S, G is growing. The results obtained can be applied in the practice of forming portfolio investment strategies.

Brazil nuts a non-timber potential: Uncertainties and investments

The Brazil nut is one of the main non-timber forest products in Brazil, but its price fluctuations generate uncertainties and risks for both extractivists and investors. Econometric models or other simpler methods can estimate price changes and indicate the investment attractiveness of the Brazil nut. The objective of the present study was to analyze the risk-return relationship and the export price for both volatility of the Brazil nut over a 15 years period. The historical series of Brazil nut export prices, shelled and unshelled nuts, was evaluated from 2002 to 2016. The geometric growth rate and the variation coefficient indicate the return and risk respectively, associated with its price series. The price volatility of shelled and unshelled Brazil nuts was estimated with the standard deviation of the price series and with generalized models of ARCH (GARCH, EGARCH and TARCH). The shelled or unshelled Brazil nut coefficient increased over 15 years, with a low risk-return ratio. The shelled Brazil nut volatility was lower in the 2002 to 2006, 2007 to 2011 and 2012 to 2016 periods than for the unshelled nut when estimated by the standard deviation method than for the unshelled nut. The shelled Brazil nut price was higher from 2002 to 2016, with low volatility and persistent shocks. The estimate of the shelled and unshelled Brazil nut price volatility was better with the TARCH and the EGARCH models, respectively.

Optimization of a Portfolio of Investment Projects: A Real Options Approach Using the Omega Measure

Investment decisions usually involve the assessment of more than one financial asset or investment project (real asset). The most appropriate way to analyze the viability of a real asset is not to study it in isolation but as part of a portfolio with correlations between the input variables of the projects. This study proposes an optimization methodology for a portfolio of investment projects with real options based on maximizing the Omega performance measure. The classic portfolio optimization methodology uses the Sharpe ratio as the objective function, which is a function of the mean-variance of the returns of the portfolio distribution. The advantage of using Omega as an objective function is that it takes into account all moments of the portfolio’s distribution of returns or net present values (NPVs), not restricting the analysis to its mean and variance. We present an example to illustrate the proposed methodology, using the Monte Carlo simulation as the main tool due to its high flexibility in modeling uncertainties. The results show that the best risk-return ratio is obtained by optimizing the Omega measure.

Unbridled spirit: Illicit markets for bourbon whiskey

The market for bourbon whiskey is booming. Demand is so great that bourbon aficionados regularly line up overnight for the chance to purchase a single bottle and high-end bourbons are allocated to consumers via lotteries. The prevalence of such non-price allocation mechanisms, however, leads to reselling in secondary markets. To characterize bourbon secondary markets, we first provide a rich description of how they function. We then use 2011 to 2019 whiskey auction data in a repeat sales regression framework to develop a novel price index for rare and vintage bourbons. Our repeat sales approach suggests that bourbon prices are increasing by about 9.1% per year over our sample period. We complement those estimates by developing a second price index using unique data from an illicit peer-to-peer secondary market that operated on a major social network between 2014 and 2017. Our estimates suggest that price increases are similar, at least during common sample periods, in our auction-house and peer-to-peer settings. We also examine how bourbon’s hedonic characteristics are related to secondary market prices and develop hedonic estimates of annual returns that range between 13.1% and 18.8%. While our sample period is relatively short, when examining bourbon’s potential as an alternative investment we find that the addition of bourbon can improve the risk-return ratio of typical stock/bond portfolios.

INVESTMENT STYLES OF REIT PROPERTY PORTFOLIOS

Investment style, comprising generic-style and specific-style, is the real estate investment management approach adopted by REIT management in guiding the construction of their portfolios. These portfolios would have distinctive return and risk performance reflecting the stated risk and return underlying the investment vision. Using quantitative and qualitative approaches, this study identified the investment style of each M-REIT listed on Bursa Malaysia. Using the generic-style criteria and analysis, M-REITs are found to have pursued passive and value strategies aided by a top-down approach to their property portfolio management. Whilst results of the specific style analysis show that core portfolios have produced a lower risk-return ratio compared to value-added and opportunistic portfolios. These findings will benefit investors by guiding their investment decision making in constructing their investment portfolios and also in deciding ways to achieve diversification.

Analyzing the quality factor for Brazil

Investments in Brazil are increasingly allocated to the stock market, at the expense of more conservative investments. Would finding higher-quality assets allow investors to increase their risk-return ratio? We analyze quality with several metrics, including the quality-minus-junk (QMJ) factor for Brazil. We find that quality companies are valued more by investors, with a higher price-to-book ratio. A portfolio of shares of higher quality shows a significant positive return over the period analyzed, adjusted for several risk factors. The sample members classified as quality companies remained within this classification over time.

Firms’ legitimation through corporate governance and its association with risk and return in Brazil

Purpose This study aims to examine the listing of firms at the highest corporate governance level of the Brazilian stock exchange (B3) as a means of legitimation and its relationship with risk and return on investment. Design/methodology/approach This paper analyzes 205 companies from 2010 to 2019, in which firms listed at the Novo Mercado level were compared with groups composed of other firms traded on B3. Findings The main results demonstrate that a listing at the supposedly higher level of corporate governance in Brazil does not indicate lower risk, a higher return or even a better risk-return ratio. Research limitations/implications The findings are restricted to this sample, representing the association identified between the analyzed phenomena and not a cause-effect relationship. Practical implications The highest level of corporate governance in Brazil brings together firms that present a higher risk (at least systematic) and lower returns (at least financial) because they seek to legitimize themselves in the market as firms committed to better management practices. Social implications These findings are useful to investors, the stock exchange, regulatory agents and the companies themselves to reflect on the purpose and usefulness of different levels of corporate governance in Brazil. Originality/value This study differs from the others that relate corporate governance to risk or return because it does not deal individually with corporate governance practices, but rather the phenomenon that is listed in a special governance level, created by the stock exchange, serving as a kind of seal legitimation.