Risk and the Required Return on Equity

Arditti, Fred D.

doi:10.1111/j.1540-6261.1967.tb01651.x

Cited by 504 publications

(111 citation statements)

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“…U 2 reduces the set of admissible utility functions to all risk averters and U 3 further requires the individual to prefer positively skewed distributions (more probability in the right tail). It has been shown empirically that investors display this kind of skewness preference (Arditti 1967;Conrath 1973;Friend/Westerfield, 1980;Cooley 1977;Levy/Sarnat 1972, p. 247;Scott/Horvath 1980. However, different results are presented in Francis 1975and Tan 1991.…”

Section: Normative Theories For Decisions Under Riskmentioning

confidence: 98%

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

Unser¹

2000

Journal of Economic Psychology

121

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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.

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Section: Normative Theories For Decisions Under Riskmentioning

confidence: 98%

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

Unser¹

2000

Journal of Economic Psychology

121

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“…Coherence is defined as a set of four desirable properties for "tail" risk measures 3 . Let V be a set of random variables, e.g.…”

Section: Axiomatic Properties: Coherencementioning

confidence: 99%

Portfolio selection models: a review and new directions

Roman

Mitra

2009

Wilmott Journal

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Modern Portfolio Theory (MPT) is based upon the classical Markowitz model which uses variance as a risk measure. A generalization of this approach leads to mean‐risk models, in which a return distribution is characterized by the expected value of return (desired to be large) and a “risk” value (desired to be kept small). Portfolio choice is made by solving an optimization problem, in which the portfolio risk is minimized and a desired level of expected return is specified as a constraint. The need to penalize different undesirable aspects of the return distribution led to the proposal of alternative risk measures, notably those penalizing only the downside part (adverse) and not the upside (potential). The downside risk considerations constitute the basis of the Post Modern Portfolio Theory (PMPT). Examples of such risk measures are lower partial moments, Value‐at‐Risk (VaR) and Conditional Value‐at‐Risk (CVaR). We revisit these risk measures and the resulting mean‐risk models. We discuss alternative models for portfolio selection, their choice criteria and the evolution of MPT to PMPT which incorporates: utility maximization and stochastic dominance. Copyright © 2009 Wilmott Magazine Ltd

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“…Beginning as early as 1967, Arditti (1967) determined that investors considered measures of downside risk beyond variance, and countless additional studies along similar lines have continued until now to demonstrate that variance is an inadequate measure of either security or portfolio 12 In our earlier studies, we used money market funds, but with the near disappearance of such funds post the Great Recession, we switched to T-bills in this study. The results of those studies were very similar to what we observed in the present study.…”

Section: Performance Measurementmentioning

confidence: 99%

Stable Value Funds Performance

Babbel

Herce

2018

Risks

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Little in the scholarly economics literature is directed specifically to the performance of stable value funds, although they occupy a leading place among retirement investment vehicles. They are currently offered in more than one-third of all defined contribution plans in the USA, with more than $800 billion of assets under management. This paper rigorously examines their performance throughout the entire period since their inception in 1973. We produce a composite index of stable value returns. We next conduct mean-variance analysis, Sharpe and Sortino ratio analysis, stochastic dominance analysis, and optimal multi-period portfolio composition analysis. Our evidence suggests that stable value funds dominate (on average) two major asset classes based on a historical analysis, and that they often occupy a significant position in optimized portfolios across a broad range of risk aversion levels. We discuss factors that contributed to stable value funds' past performance and whether they can continue to perform well into the future. We also discuss considerations regarding whether or not to include stable value as an element in target date funds within defined contribution pension plans.

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Risk and the Required Return on Equity

Cited by 504 publications

References 0 publications

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

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

Portfolio selection models: a review and new directions

Stable Value Funds Performance

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