Portfolio Selection Based On The Maximum Risk Tolerance

In the former study of investment decision and asset selection, most studies assume that investors have the characteristic of risk averse while ignoring the existence of "mortality risk" and the attention the investors paid to it. This situation not only is inconsistent with logic but also separates from practice. As the development of financial innovation, the ever-consolidating trend of leveraged investment, as well as the closer economic relationship form this trend makes the "mortality risk" potential to be the important source of financial crisis. So it is of increasingly urgent to study "mortality risk" both in theory and practice.Combining with the latest advances in VAR, this paper attempts to transform the "mortality risk" problem into maximum risk tolerance problem to study investment decision and risk control from the financial perspective. From the definition and feature of "mortality risk", the basic guideline is to transform the "mortality risk" into maximum risk tolerance through the comparison between "mortality risk" and maximum risk tolerance. Then this paper discusses the relationship between maximum risk tolerance and "mortality risk" and researches on the expectation which based on maximum risk tolerance-VaR combination model and the expectation which based on maximum risk tolerance-CVaR combination model from the financial perspective by algorithms concerning about VaR and studies the solving process of the two models in detail.This paper includes5parts:The first part introduces the relation among "mortality risk", maximum risk tolerance, VaR and their consistency of key contents.The second part illustrates the theory of "mortality risk", Copula theory, Extreme Value theory and the measurement of VaR.The third part proposes the construction of portfolio model under maximum risk tolerance restrain based on financial perspective.The fourth part solves the portfolio model proposed in part3.At last, we will show some case studies and empirical evidence.No matter from theoretical analysis or from empirical evidence, expectation which based on maximum risk tolerance constraint-VaR combination model and expectation which based on maximum risk tolerance constraint-CVaR combination model are all further modification of the traditional portfolio model. What’s more, the CVaR combination model is superior to the VaR combination model.