While investors may prefer to use dierent risk

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Unformatted text preview: amework in portfolio selection. • While investors may prefer to use different risk measures, the fundamental issue in investment science is to strike a balance between the risk and the expected return within a two-objective decision making framework. • Compared to the utility framework, it is easier for investors to appreciate the return-risk framework and is more direct for investors to relate themselves to the return-risk framework, as risk is clearly quantified. • Mean-variance formulation leads to a quadratic programming problem which possesses a lot of computational advantages. 4 Mean-Semivariance Model • Both Markowitz (1959) and Mao (1970) suggested to adopt the lower semivariance n E [(min{ n Ri xi ], 0})2 ] Ri xi − E [ i=1 i=1 as a risk measure for (downside) risk of the portfolio. • If distribution is symmetrical, semivariance is proportional to variance. • Although the mean-semivariance model can be also transformed into a convex quadratic programming problem, it is not widely used as the variance. 5 Mean-Absolute Deviation Model • Konno and Yamazaki (1991) proposed to adopt the absolute deviation as the risk of a portfolio: n E [| n Rj xj − E [ j =1 Rj xj ]|]. j =1 • Obviously, the absolute deviati...
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This note was uploaded on 01/05/2013 for the course SEEM 5820 taught by Professor Duanli during the Fall '11 term at CUHK.

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