Portfolio Selection with Skewness

  • Phelim Boyle
  • Brian Ding

Abstract

Konno et al. (1993) proposed a method for incorporating skewness into the portfolio optimization problem. This paper extends their technique and proposes a modification which leads to portfolios with improved characteristics. The model is then used to analyze the potential for put options to increase the skewness of portfolios. This strategy is tested with historical returns on a portfolio of TSE stocks. Compared to the Konno et al. (1993) approach our resulting portfolio has higher skewness and lower variance; with expected return being equal.

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  1. Boyle, Phelim P. and Ananthananarayanan, A.L. (1979). The impact of variance estimation in option valuation models. Journal of Financial Economics, 6:375–388.Google Scholar
  2. Davies, R. J., Kat H. M., and Lu, S. (2004). Fund of Hedge Fund Portfolio Selection: A Multiple Objective Approach. Working paper, Cass Business School, City University, London UKGoogle Scholar
  3. Kahneman, D. and Tversky A. (1979). Prospect theory: an analysis of decision under risk. Econometrica, 47:263–292.Google Scholar
  4. Konno, H., Shirakawa, H., and Yamazaki, H. (1993). A mean-absolute deviation-skewness portfolio optimization model. Annals of Operations Research, 45:205–220.MathSciNetCrossRefGoogle Scholar
  5. Lee, P.J. (1992). Portfolio selection in the presence of options and the distribution of return of portfolios containing options. 3rd AFIR International Colloquium, 2:691–709.Google Scholar
  6. Markowitz, H. (1952). Portfolio selection. Journal of Finance, 7:77–91.Google Scholar
  7. Levy, H. and Levy, M. (2004). Prospect theory and mean-variance analysis. Review of Financial Studies, 17:1015–1041.CrossRefGoogle Scholar
  8. Sun, Q. and Yan, Y. (2003). Skewness persistence with optimal portfolio selection. Journal of Banking and Finance, 27:1111–1121.CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media, Inc. 2005

Authors and Affiliations

  • Phelim Boyle
  • Brian Ding

There are no affiliations available

Personalised recommendations