Have your cake and eat it too: increasing returns while lowering large risks!

Details Have your cake and eat it too: increasing returns while lowering large risks! Have your cake and eat it too: increasing returns while lowering large risks!

1999-07-15

arxiv.org/abs/cond-mat/9907217v1

Journal of Risk Finance 2 (3), 70-82 (spring 2001)

Physics

Condensed Matter

Statistical Mechanics

10 pages, 5 figures

Scientific paper

Based on a faithful representation of the heavy tail multivariate distribution of asset returns introduced previously (Sornette et al., 1998, 1999) that we extend to the case of asymmetric return distributions, we generalize the return-risk efficient frontier concept to incorporate the dimensions of large risks embedded in the tail of the asset distributions. We demonstrate that it is often possible to increase the portfolio return while decreasing the large risks as quantified by the fourth and higher order cumulants. Exact theoretical formulas are validated by empirical tests.

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