A Customized LPM Risk Measure for Portfolio Analysis

Nawrocki, David N.; Kilroy, Katharine

doi:10.1111/j.1540-6288.1986.tb00736.x

Cited by 4 publications

(4 citation statements)

References 2 publications

(2 reference statements)

Supporting

Mentioning

Contrasting

Order By: Relevance

“…Using Upper to scale Lower controls for firm-level differences in the upside states and thus refines the comparison of downside risk across firms. Also, the relative root lower partial moment incorporates cases where investors have asymmetric reactions to downside versus upside states (for more information also see, e.g., Markowitz 1952Markowitz , 1959Tobin 1958;Fama 1965a;Samuelson 1967;Stone 1973;Fishburn 1977;Laughhunn et al 1980;Nawrocki and Staples 1989;Unser 2000).…”

Section: Resultsmentioning

confidence: 99%

Accounting-Based Downside Risk, Cost of Capital, and the Macroeconomy

et al. 2015

View full text Add to dashboard Cite

We hypothesize that earnings downside risk, capturing the expectation for future downward operating performance, contains distinct information about firm risk and varies with cost of capital in the cross section of firms. Consistent with the validity of the earnings downside risk measure, we find that, relative to low earnings downside risk firms, high earnings downside risk firms experience more negative operating performance over the subsequent period, are more sensitive to downward macroeconomic states, and are more strongly linked to earnings attributes and other risk-related measures from prior research. In line with our prediction, we also find that earnings downside risk explains variation in firms' cost of capital, and that this link between earnings downside risk and cost of capital is incremental to several earnings attributes, accounting and risk factor betas, return downside risk, default risk, earnings volatility, and firm fundamentals. Overall, this study contributes to accounting research by demonstrating the key valuation and risk assessment roles of earnings downside risk derived from firms' financial statements, also shedding new light on the link between accounting and the macroeconomy.

show abstract

Section: Resultsmentioning

confidence: 99%

Accounting-Based Downside Risk, Cost of Capital, and the Macroeconomy

et al. 2015

View full text Add to dashboard Cite

show abstract

“…For normal and Student-t-distributions of returns the LPM based model reduces to the conventional CAPM. Empirical and simulation studies show the superiority of mean-LPM based portfolio selection criteria towards the traditional mean-variance based approach under the assumption of shortfall-risk oriented investors (Porter/Gaumnitz 1972;Russell/Seo 1980;Leibowitz/Langetieg 1989;Nawrocki/Staples 1989;Sortino/van der Meer 1991;Sortino/Forsey 1996;Harlow 1991). An empirical study using data from the German stock market shows that regressions with LPM-betas explain stock returns better than regressions with traditional betas.…”

Section: Lower Partial Moments In Finance Theorymentioning

confidence: 99%

Lower partial moments as measures of perceived risk: An experimental study

Unser¹

2000

Journal of Economic Psychology

121

View full text Add to dashboard Cite

Abstract:The paper reports the results of an experiment on individual investors' risk perception in a stock market context under two different modes of information presentation (framings). While the concentration on two moments of a return distribution has been a cornerstone of neo-classic finance theory from the start (Markowitz 1952) an alternative's mean and variance have been selected more by convenience and ease of computation than by theoretical or empirical justification. Even though the most influential models are based on variance as risk measure there has always been much discontent with this proposal. The symmetrical nature of variance does not capture the common notion of risk as something undesired, e. g. negative deviations from a reference point. Instead, lower partial moments (LPM) seem to be more appropriate for measuring risk. The purpose of this paper is to examine experimentally private investors' risk perception in a financial context. The focus is on the correspondence of people's risk perceptions with specific LPMs. The main findings can be summarized as follows. First, symmetrical risk measures like variance can be clearly dismissed in favor of shortfall measures like LPMs. Second, the reference point (target) of individuals for defining losses is not a distribution's mean but the initial price in a time series of stock prices. Third, the LPM which explains risk perception best is the LPM 0 , i. e. the probability of loss. Fourth, the framing of price distributions (histograms versus charts) exerts a significance influence on average risk ratings, the latter being higher for the histogram framing. Fifth, positive deviations from an individual reference point tend to decrease perceived risk.

show abstract

“…Nawrocki and Staples (1989) expand the scope of Nawrocki (1983) by considering the lower partial moment (LPM) as a risk measure.…”

Section: E Some Possible Solutionsmentioning

confidence: 99%