Computational asset allocation using one-sided and two-sided variability measures

Abstract

Excluding the assumption of normality in return distributions, a general reward-risk ratio suitable to compare portfolio returns with respect to a benchmark must includes asymmetrical information on both "good" volatility (above the benchmark) and "bad" volatility (below the benchmark), with different sensitivities. Including the Farinelli-Tibiletti ratio and few other indexes recently proposed by the literature, the class of one-sided variability measures achieves the goal. We investigate the forecasting ability of eleven alternatives ratios in portfolio optimization problems. We employ data from security markets to quantify the portfolio's overperformance with respect to a given benchmark. © Springer-Verlag Berlin Heidelberg 2006.