Optimality Conditions in Portfolio Analysis with General Deviation Measures
University of Florida Industrial and Systems Engineering Working Paper No. 2004-7
23 Pages Posted: 9 Nov 2004
Date Written: May 10, 2005
Optimality conditions are derived for problems of minimizing a generalized measure of deviation of a random variable, with special attention to situations where the random variable could be the rate of return from a portfolio of financial instruments. Generalized measures of deviation go beyond standard deviation in satisfying axioms that do not demand symmetry between ups and downs. The optimality conditions are applied to characterize the generalized master funds which elsewhere have been developed in extending classical portfolio theory beyond the case of standard deviation. The consequences are worked out for deviation based on conditional value-at-risk and its variants, in particular.
Keywords: Generalized deviation measures, portfolio analysis, generalized master funds, CAPM-like relations, optimality conditions, risk envelopes, risk identifiers, conditional value-at-risk, risk management, stochastic optimization
JEL Classification: C0, C2, C6
Suggested Citation: Suggested Citation