Controlling risk through diversification in portfolio selection with non-historical information

Calvo, Clara; Ivorra, Carlos; Liern, Vicente

doi:10.1057/s41274-017-0195-6

Cited by 5 publications

(5 citation statements)

References 9 publications

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“…For this theory of allocation of financial assets under uncertainty also known as theory of portfolio choice that performance of an individual asset is not as important as performance of an entire portfolio. However, it has been argued that managing a portfolio according to MPT may push risk-averse investors into more risk (Calvo, Ivorra, & Liern, 2018).…”

Section: Modern Portfolio Theory (Mpt)mentioning

confidence: 99%

Portfolio Allocation and Financial Performance of Insurance Industry in Nigeria

Olusegun¹,

Omotayo²

2022

IJEFM

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This paper investigated the connection between portfolio allocation and financial performance of insurance industry in Nigeria. The data was obtained from secondary sources and estimated with autoregressive distributed lag (ARDL). The study discovered a long-run relationship between portfolio allocation to cash and equivalents, financial assets, reinsurance assets, investment properties, other receivables and prepayments, property and equipment and financial performance proxied by growth in gross premium income (GPI). Further research reveals that allocation to in cash and equivalents, other receivables and prepayments and properties and equipment had an insignificant negative effect on GPI. Furthermore, the study discovered that investment in financial assets, reinsurance assets and investment properties had positive statistically significant relationship with GPI. This result implies that insurance companies’ investment in financial assets, reinsurance assets, investment properties is relativ ely high and do have strong correlation with financial performance. Hence, portfolio management in insurance industry plays a crucial role in finance. Policy should be geared towards purchase of valueadding property and equipment, purchase of intangibles, efficient utilization of proceeds from sale of property and equipment and retention of cash and cash equivalents for prompt payment of claims.

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Section: Modern Portfolio Theory (Mpt)mentioning

confidence: 99%

Portfolio Allocation and Financial Performance of Insurance Industry in Nigeria

Olusegun¹,

Omotayo²

2022

IJEFM

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“…In [22], we use the value of information to define an index measuring the financial impact of each possible set of diversification constraints when it is incorporated into a portfolio selection model, but, to this purpose, the above defined value of information has an obvious drawback, namely, that it takes as ideal reference an exact forecasting of the return of each asset, and hence the index defined in [22] does not take into account the possible effects that a good-but not exact-forecast would produce. This is not important in order to establish a relative ranking of several alternative sets of diversification constraints, as we did in [22], but in order to select the most adequate one in a particular context, it is desirable to somehow include into our analysis the reliability of the forecasted returns the investor is considering. Thus, in the next section we revisit the reduction index introduced in [22].…”

Section: Value Of Informationmentioning

confidence: 99%

“…This is not important in order to establish a relative ranking of several alternative sets of diversification constraints, as we did in [22], but in order to select the most adequate one in a particular context, it is desirable to somehow include into our analysis the reliability of the forecasted returns the investor is considering. Thus, in the next section we revisit the reduction index introduced in [22].…”

Section: Value Of Informationmentioning

confidence: 99%

“…In this approach, we are conceiving forecasts as measures of objective values (the returns of the next investment period) subjected to measurement errors, and we deal with those errors in the standard way, namely, by means of a normal distribution. Now, following [22], we fix a historical base portfolio selection problem (HP k ) that maximizes the expected return at the k-th period (calculated asr •x) subject to the capital constraint ∑ i x i = 1 and any other constraint considered by the investor not related to risk aversion. The simplest possibility is:…”

Section: The Historical Reduction Index Of a Set Of Diversification Cmentioning

confidence: 99%

“…• V k a (α) and V k r (S, α) are the net profit provided by a forecast with reliability α with regard to the profit attained when the historical mean returns are taken as expected returns (they generalize the concept of value of information of [22], which in turn generalize that of [15]).…”

Section: The Historical Reduction Index Of a Set Of Diversification Cmentioning

confidence: 99%

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Grading Investment Diversification Options in Presence of Non-Historical Financial Information

et al. 2021

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Modern portfolio theory deals with the problem of selecting a portfolio of financial assets such that the expected return is maximized for a given level of risk. The forecast of the expected individual assets’ returns and risk is usually based on their historical returns. In this work, we consider a situation in which the investor has non-historical additional information that is used for the forecast of the expected returns. This implies that there is no obvious statistical risk measure any more, and it poses the problem of selecting an adequate set of diversification constraints to mitigate the risk of the selected portfolio without losing the value of the non-statistical information owned by the investor. To address this problem, we introduce an indicator, the historical reduction index, measuring the expected reduction of the expected return due to a given set of diversification constraints. We show that it can be used to grade the impact of each possible set of diversification constraints. Hence, the investor can choose from this gradation, the set better fitting his subjective risk-aversion level.

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