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RISK AND INVESTMENT OPPORTUNITIES IN

PORTFOLIO OPTIMIZATION

Ali Argun Karacabey

Ankara University, Turkey.

ABSTRACT

Markowitz legendary work about portfolio optimization is accepted to be the pioneer of the modern portfolio theory. Contrary to its theoretical reputation, it has not been used extensively. Konno and Yamazaki (1991) proposed a new portfolio optimization model as an alternative to Markowitz’s mean-variance model. Markowitz’s mean variance model and the mean absolute deviation models regard risk in terms of deviations that may be either positive (upward) or negative (downward) in relation to the expected return. In other words both of the models penalize not only the negative (downward) deviations but also the positive (upward) deviations. In this paper, a new model that takes into consideration both risk and a better investment opportunity is proposed. The difference between the proposed model and the other portfolio optimization models is their objectives. The proposed model assumes that an investor wants to choose a portfolio with higher upside deviations and lower downside deviations.

 

Key word: portfolio optimization, MAD, downside risk

 

JEL Codes: G 11, G12, G32