Purpose
The purpose of this paper is to create a universal (asset-class-independent) portfolio risk index for a global private investor.
Design/methodology/approach
The authors first discuss existing risk measures and desirable properties of a risk index. Then, they construct a universal (asset-class-independent) portfolio risk measure by modifying Financial Turbulence of Kritzman and Li (2010). Finally, the average portfolio of a representative global private investor is determined, and, by applying the new portfolio risk measure, they derive the Private investor Risk IndeX.
Findings
The authors show that this index exhibits commonly expected properties of risk indices, such as proper reaction to well-known historical market events, persistence in time and forecasting power for both risk and returns to risk.
Practical implications
A dynamic asset allocation example illustrates one potential practical application for global private investors.
Originality/value
As of now, a risk index reflecting the overall risk of a typical multi-asset-class portfolio of global private investors does not seem to exist.
We describe existing and potential financial applications of the Mahalanobis distance. After a short motivation and a discussion of important properties of this multivariate distance measure, we classify its applications in finance according to the source and nature of its input parameters. Examples illustrate the usefulness of these applications of the Mahalanobis distance for financial market participants.
scite is a Brooklyn-based organization that helps researchers better discover and understand research articles through Smart Citations–citations that display the context of the citation and describe whether the article provides supporting or contrasting evidence. scite is used by students and researchers from around the world and is funded in part by the National Science Foundation and the National Institute on Drug Abuse of the National Institutes of Health.