Multi-Objective Optimal Portfolio with Different Tail-Risk Attitudes

ZHAO Xia, SHI Yu, OUYANG Zisheng

Journal of Systems Science and Mathematical Sciences ›› 2022, Vol. 42 ›› Issue (5) : 1129-1144.

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Journal of Systems Science and Mathematical Sciences ›› 2022, Vol. 42 ›› Issue (5) : 1129-1144. DOI: 10.12341/jssms21444

Multi-Objective Optimal Portfolio with Different Tail-Risk Attitudes

  • ZHAO Xia1, SHI Yu1, OUYANG Zisheng2
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Abstract

Financial crises have occurred frequently in recent years, and hence, the extreme risk has attracted a great attention in asset management. Considering the effect of investor's aversion toward tail-risk on investment strategy, this paper uses the adjusted kurtosis coefficient and K-means method to cluster assets. Subsequently, considering that investors hold different attitudes toward the tail-risks of different asset groups, two multi-objective optimization models are constructed based on meanvariance-CVaR criterion. From the simulation and empirical study, we find that the proposed models control the risk of portfolio by reducing the total investment ratio for a given target return. Compared with the model without the consideration of investor's different attitudes, the proposed models can better control the risk and have a more robust out-of-sample performance. Especially, when the investor's aversion toward tail-risk changes, the second model proposed in this paper can obtain a more adaptive investment strategy by adjusting the aversion coefficients for different asset groups.

Key words

Mean-variance-CVaR criterion / portfolio / attitude toward tail-risk / Kmeans clustering

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ZHAO Xia , SHI Yu , OUYANG Zisheng. Multi-Objective Optimal Portfolio with Different Tail-Risk Attitudes. Journal of Systems Science and Mathematical Sciences, 2022, 42(5): 1129-1144 https://doi.org/10.12341/jssms21444

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