Study On Asset Allocation Based On Downside Risk

With the development of domestic financial reform and economy globalization, the domestic financial industry also face unprecedented risks and challenges. Some decision-making department of financial institutions have put forward specific requirements about the application of Financial optimization in the practice. In light of China's reality, it has become the consensus of financial industry and the academic community that apply the financial optimization theory and method to financial decision-making practice. On the long-term development of China's institutional investors, handling risk brought about by the uncertainty environmental correctly and optimizing asset allocation have crucial significance.In the traditional investment theory, investor is supposed to be risk aversion, that is, investor would choose less risky portfolio on the same expect return. However, it is not right in the practice. In the China's securities market, many investors'expected return is lower than the saving in their average holding period. But most of the investors do not stop investment. So assuming that investors is risk aversion is not entirely consistent with the actual situation.Asset allocation is the most important factors to decide the yield and risk of a portfolio. Dynamic asset allocation is the premise to make correct strategic asset allocation and has important guiding significance to long-term investors. Loss aversion is a widespread psychological phenomenon. Existing research on loss aversion and downside risk are independent. Introducing loss aversion to dynamic asset allocation can have more profound understanding of the nature of dynamic asset allocation and provide better decision-making recommendations. Downside risk can not fully reflect investor's risk preference. Researching the consistency and finding dynamic risk measurement methods which can describe the complex psychology will provide support to the decision-making of investors.On the base of fat tail and risk preference of investors, we prove two-fund separation theorem with different targets in the context of mean-LPM portfolio optimization and the properties of its monetary separation. In order to explain risk-seeking and risk-averse behavior above as well as below the target return, this paper use a general Upper Partial Moment/Lower Partial Moment (UPM/LPM) model .In particularly, we apply simulation to compare optimization portfolio of the UPM/LPM model and we find result of asset allocation by Matlab. And by choosing appropriate exponential, the UPM/LPM model is able to reflect investors'various asymmetric preferences.In this paper, polynomials extend of normal density function are introduced to explain skewness and kurtosis.We study the impact of skewness and kurtosis on the optimal investment strategic and find fat tail distributed will affect asset allocation of equity capital which is different with others.We study the model with worst-case portfolio outcome. Using extent K-T ,martingale and standard option pricing results, the optimal strategy is derived. The optimal policy is equivalent to the hedging portfolio of a European option on a dynamic mutual fund. We examine the sensitivity of the investment strategy as the downside risk control intensity changes.