Reliability-based portfolio optimization with conditional value at risk (CVaR)

摘要

This paper builds on the work of Roman et al. [Quant. Finance, 2007, 7, 443-458], whereby we incorporate the concept of the reliability-based design optimization (RBDO) technique. We reformulate Roman et al.'s model by including both non-deterministic design variables as well as probabilistic parameter values of returns of assets, and solve it with a relevant probabilistic constraint. Apart from a similar set of conclusions as derived by Roman et al., we deduce a few other interesting observations, some of which are: (i) reliability forces diversification and hence reduces portfolio risk; (ii) an increase in the level of reliability aids in better portfolio management, as it aids diversification; and (iii) a decrease in the investor's attitude with respect to how reliable the input data is, has an adverse effect on the optimal value of the portfolio risk/variance.