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A generalized measure of riskiness. (English) Zbl 1279.91129

Summary: This paper proposes a generalized measure of riskiness that nests the original measures pioneered by R. J. Aumann and R. Serrano [J. Polit. Econ. 116, No. 5, 810–836 (2008; Zbl 1341.91040)] and D. P. Foster and S. Hart [“An operational measure of riskiness”, ibid. 117, No. 5, 785–814 (2009; doi:10.1086/644840)]. The paper introduces the generalized options’ implied measure of riskiness based on the risk-neutral return distribution of financial securities. It also provides asset allocation implications and shows that the forward-looking measures of riskiness successfully predict the cross section of 1-, 3-, 6-, and 12-month-ahead risk-adjusted returns of individual stocks. The empirical results indicate that the generalized measure of riskiness is able to rank equity portfolios based on their expected returns per unit of risk and hence yields a more efficient strategy for maximizing expected return of the portfolio while minimizing its risk.

MSC:

91B82 Statistical methods; economic indices and measures
91G10 Portfolio theory

Citations:

Zbl 1341.91040
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