Mean-CVaR portfolio selection model with ambiguity in distribution and attitude

Abstract

In this paper, we develop α-robust (maxmin) models, where the Conditional Value-at-Risk (CVaR) is to be optimized under ambiguity in distribution, mean returns, and covariance matrix. Our models allow the investor to distinguish ambiguity and ambiguity attitude with different levels of ambiguity aversion. For the case when there is a risk-free asset and short-selling is allowed, we obtain the analytic solution for the α-robust CVaR optimization model subject to a minimum mean return constraint. Moreover, we also derive a closed-form portfolio rule for the α-robust mean-CVaR optimization problem in a market without the risk-less asset. The results obtained from solving the numerical example show that if an investor is more ambiguity-averse, his investment strategy will always be more conservative.

Determining the investors' strategy during the COVID-19 crisis based on the S&P 500 stock index

“…By solving this task, we will determine the optimal weights of assets in the portfolio at the specified minimum value of the expected return while minimizing the CVaR risk function. The interested reader can find more about CVaR in Hamdi, Karimi, Mehrdoust, & Belhaouari, (2022), Bodnar, Lindholm, Niklasson, & Thorsen, (2022), Arici, Campi, Care, Dalai, & Ramponi, (2021), Wang & Zhu, (2021) and Kang, Li, & Li, (2020).…”