Power-Log Portfolio Optimization for Managing Downside Risk

SMC Author

Jivendra Kale

SMC Affiliated Work

1

Status

Faculty

School

School of Economics and Business Administration

Department

Finance

Document Type

Article

Publication Date

3-2016

Publication / Conference / Sponsorship

International Review of Business Research Papers

Description/Abstract

This research paper tests the effectiveness of Power-Log optimization for managing the downside risk of investment portfolios. It uses Power-Log utility functions, which are based on tenets of behavioral finance, to give investors the ability to build downside protection directly into a portfolio. Comparing optimal Power-Log portfolios with matched mean-variance efficient portfolios, we find that the optimal Power-Log portfolios have lower downside risk, while delivering higher geometric average return. They also provide much better downside protection against unanticipated market shocks, such as the one in 2008, in contrast to the disastrous performance for matched mean-variance efficient portfolios. Power-Log optimization succeeds in managing downside risk effectively, while mean variance analysis fails to protect investors from such risk.

Scholarly

yes

Peer Reviewed

1

DOI

10.21102/irbrp.2016.03.121.07

Volume

12

Issue

1

First Page

97

Last Page

109

Disciplines

Business | Economics | Finance and Financial Management

Original Citation

Kale, J. K. & Sheth, A. (2016). Power-log portfolio optimization for managing downside risk. International Review of Business Research Papers, 12(1), 97-109. doi:10.21102/irbrp.2016.03.121.07

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