Prague Economic Papers 2015, 24(1):3-16 | DOI: 10.18267/j.pep.497

Portfolio Selection with Uncertainty Measures Consistent with Additive Shifts

Rosella Giacometti1, Sergio Ortobelli2, Tomáš Tichý3
1 Department MSIA, University of Bergamo, Via dei Caniana 2, 24 127 Bergamo, Italy.
2 Lozza, Department MSIA, University of Bergamo, Via dei Caniana 2, 24 127 Bergamo, Italy and Department of Finance, Faculty of Economics, VŠB-Technical University of Ostrava, Sokolská 33, 701 21 Ostrava, Czech Republic.
3 Department of Finance, Faculty of Economics, VŠB-Technical University of Ostrava, Sokolská 33, 701 21 Ostrava, Czech Republic (tomas.tichy@vsb.cz).

Assuming a non-satiable risk-averse investor, the standard approach to portfolio selection suggests discarding of all inefficient investment in terms of mean return and its standard deviation ratio within its first step. However, in literature we can find many alternative dispersion and risk measures that can help us to identify the most suitable investment opportunity. In this work two new dispersion measures, fulfilling the condition that ""more is better than less"" are proposed. Moreover, their distinct characteristics are analysed and empirically compared. In particular, starting from the definition of dispersion measures, we discuss the property of consistency with respect to additive shifts and we examine two dispersion measures that satisfy this property. Finally, we empirically compare the proposed dispersion measures with the standard deviation and the conditional value at risk on the US stock market. Moreover, within the empirical example the so called ""alarm"" is incorporated in order to predict potential fails of the market.

Keywords: alarm signal, dispersion measure, investment, Sharpe ratio, stochastic dominance, systemic risk
JEL classification: C58, G11

Published: January 1, 2015  Show citation

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Giacometti, R., Ortobelli, S., & Tichý, T. (2015). Portfolio Selection with Uncertainty Measures Consistent with Additive Shifts. Prague Economic Papers, 24(1), 3-16. doi: 10.18267/j.pep.497
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