Grading Investment Diversification Options in Presence of Non-Historical Financial Information
Modern portfolio theory deals with the problem of selecting a portfolio of financial assets such that the expected return is maximized for a given level of risk. The forecast of the expected individual assets’ returns and risk is usually based on their historical returns. In this work, we consider a...
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| Format: | Article |
| Language: | English |
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MDPI AG
2021-03-01
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| Series: | Mathematics |
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| Online Access: | https://www.mdpi.com/2227-7390/9/6/692 |
| _version_ | 1797540286628364288 |
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| author | Clara Calvo Carlos Ivorra Vicente Liern Blanca Pérez-Gladish |
| author_facet | Clara Calvo Carlos Ivorra Vicente Liern Blanca Pérez-Gladish |
| author_sort | Clara Calvo |
| collection | DOAJ |
| description | Modern portfolio theory deals with the problem of selecting a portfolio of financial assets such that the expected return is maximized for a given level of risk. The forecast of the expected individual assets’ returns and risk is usually based on their historical returns. In this work, we consider a situation in which the investor has non-historical additional information that is used for the forecast of the expected returns. This implies that there is no obvious statistical risk measure any more, and it poses the problem of selecting an adequate set of diversification constraints to mitigate the risk of the selected portfolio without losing the value of the non-statistical information owned by the investor. To address this problem, we introduce an indicator, the historical reduction index, measuring the expected reduction of the expected return due to a given set of diversification constraints. We show that it can be used to grade the impact of each possible set of diversification constraints. Hence, the investor can choose from this gradation, the set better fitting his subjective risk-aversion level. |
| first_indexed | 2024-03-10T12:58:50Z |
| format | Article |
| id | doaj.art-457d78e089cd4873b586cc6870b4a570 |
| institution | Directory Open Access Journal |
| issn | 2227-7390 |
| language | English |
| last_indexed | 2024-03-10T12:58:50Z |
| publishDate | 2021-03-01 |
| publisher | MDPI AG |
| record_format | Article |
| series | Mathematics |
| spelling | doaj.art-457d78e089cd4873b586cc6870b4a5702023-11-21T11:41:44ZengMDPI AGMathematics2227-73902021-03-019669210.3390/math9060692Grading Investment Diversification Options in Presence of Non-Historical Financial InformationClara Calvo0Carlos Ivorra1Vicente Liern2Blanca Pérez-Gladish3Department of Mathematics for Economics and Business, University of Valencia, Avda. dels Tarongers s/n, 46022 Valencia, SpainDepartment of Mathematics for Economics and Business, University of Valencia, Avda. dels Tarongers s/n, 46022 Valencia, SpainDepartment of Mathematics for Economics and Business, University of Valencia, Avda. dels Tarongers s/n, 46022 Valencia, SpainDepartment of Economy Quantitative, University of Oviedo, Campus del Cristo, 33006 Oviedo, SpainModern portfolio theory deals with the problem of selecting a portfolio of financial assets such that the expected return is maximized for a given level of risk. The forecast of the expected individual assets’ returns and risk is usually based on their historical returns. In this work, we consider a situation in which the investor has non-historical additional information that is used for the forecast of the expected returns. This implies that there is no obvious statistical risk measure any more, and it poses the problem of selecting an adequate set of diversification constraints to mitigate the risk of the selected portfolio without losing the value of the non-statistical information owned by the investor. To address this problem, we introduce an indicator, the historical reduction index, measuring the expected reduction of the expected return due to a given set of diversification constraints. We show that it can be used to grade the impact of each possible set of diversification constraints. Hence, the investor can choose from this gradation, the set better fitting his subjective risk-aversion level.https://www.mdpi.com/2227-7390/9/6/692portfolio selectionvalue of informationdiversification |
| spellingShingle | Clara Calvo Carlos Ivorra Vicente Liern Blanca Pérez-Gladish Grading Investment Diversification Options in Presence of Non-Historical Financial Information Mathematics portfolio selection value of information diversification |
| title | Grading Investment Diversification Options in Presence of Non-Historical Financial Information |
| title_full | Grading Investment Diversification Options in Presence of Non-Historical Financial Information |
| title_fullStr | Grading Investment Diversification Options in Presence of Non-Historical Financial Information |
| title_full_unstemmed | Grading Investment Diversification Options in Presence of Non-Historical Financial Information |
| title_short | Grading Investment Diversification Options in Presence of Non-Historical Financial Information |
| title_sort | grading investment diversification options in presence of non historical financial information |
| topic | portfolio selection value of information diversification |
| url | https://www.mdpi.com/2227-7390/9/6/692 |
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