Fundamental Portfolio Construction Based on Semi-Variance
Anna Rutkowska-Ziarko
Department of Quantitative Methods, University of Warmia and Mazury in OlsztynAbstract
In models for creating a fundamental portfolio, based on the classical Markowitz model, the variance is usually used as a risk measure. However, equal treatment of negative and positive deviations from the expected rate of return is a slight shortcoming of variance as the risk measure. Markowitz defined semi-variance to measure the negative deviations only. However, finding the fundamental portfolio with minimum semi-variance is not possible with the existing methods.The aim of the article is to propose and verify a method which allows to find a fundamental portfolio with the minimum semi-variance. A synthetic indicator is constructed for each company, describing its economic and financial situation. The method of constructing fundamental portfolios using semi-variance as the risk measure is presented. The differences between the semi-variance fundamental portfolios and variance fundamental portfolios are analysed on example of companies listed on the Warsaw Stock Exchange.
Keywords:
Markowitz model, fundamental portfolio, semi-variance, Mahalanobis distanceReferences
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Department of Quantitative Methods, University of Warmia and Mazury in Olsztyn
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