Risk Measurement And Portfolio New Method - Bilateral Part Of The Moment Model

This dissertation develops a new risk measure: Bilateral Partial Moment (BPM). Unlike variance risk measure which punishes the desirable upside movement as hard as undesirable downside movement, unlike the downside risk which solely considers underperformance as risk and discard the better investment opportunities, BPMs are intuitive measures of risk that not only focus on return dispersions below a specified target or benchmark return, but also use the return dispersions above a pre-specified target rate that contains promising profit. What's more, BPMs are a class of full domain risk measures, where downside risk is supplemented with the "upside potential".Most theoretical models in financial economics measure risk as variance. The symmetrical nature of variance which assigns the same weight to positive as to negative deviations from the expected value does not capture the common notion of risk as a negative undesired characteristic of an alternative. Therefore, the downside risk seems to be more appropriate for measuring risk. But the partial nature of downside risk which assigns neutrality to returns above target rate does not capture the pursuits of better investment opportunities by most investors. BPM is a general version of risk definition. It applies upside potential to revise the downside risk. BPMs are capable of punishing die undesired negative movements and of approving the desired positive movements. BPMs preclude many of the shortcomings that plague the measures of risk adopted currently.Under the new risk measure, the computation recipes of the portfolio selection in the Bilateral Partial Moment framework are provided: portfolio selection of discrete distributions in the bilateral partial framework is transformed into quadratic programming or linear programming, whose computations are famous for their robustness and simplicity. Furthermore, an empirical study on asset allocation is carriedout. Empirical evidence successfully supports that: as to the EB framework, it not only gives the investor the very freedom to specify an appropriate target returns, but also provides the flexibility for the investor to determine how much attention should be paid to the upside potentials. Therefore, the investor can fully benefit from the achievement of an optimal risk-return tradeoff from the available opportunities.This dissertation is organized as follows: the motivation is presented in chapter 1, and chapter 2 reviews the risk measure and portfolio selection. Chapter 3 is the central part of this dissertation, where the bilateral partial moment is established. The definition, the theoretical foundation and its application to portfolio selection are discussed. And the evidence is found in chapter 4 of an empirical study.Chapter 1, the motivation. The bilateral partial moment risk measure is motivated during the dancing with the investment risk: Many financial decision makers seem to regard risk as the volatility of below-target returns and treat the volatility of above-target returns as a sweetener. BPMs risk measure come much closer to the perceive of investors, which not only treat the left-hand side which involves loss as risk, but also take the right-hand side which contains profits into consideration to compensate for risk.Chapter 2, a literature overview of risk measure and portfolio selection. The traditional mean variance approach is reviewed in section 2.1. The new-classic work of Markowitz (1952, 1959), "expected returns-variance of returns" rule (EV) is explained. EV analysis remains the cornerstone of much of the work in the field of investment analysis. The EV efficiency, the Capital Asset Pricing Model (CAPM), the simplifications and extensions of the EV approach and the limited generality of the EV approach are introduced together. The downside risk approach is surveyed in section 2.2. The risk definition of Lower Partial Moment (LPM) is clarified, the expected return-lower partial moment of return (EL) portfolio optimization, and Value at Risk (VaR) are overlooked, and emp...