Application of Multi-Period Low Partial Moment Approach to Investment Portfolio Optimization and Impact of Different Moments on Portfolio Performance

Abstract

The present study aimed to present a model to choose the optimum multi-period investment portfolio with attitude toward lower partial moment as a measure of risk. The data used in this study contains historical returns of companies listed on the Tehran Stock Exchange over the period March 2014 to March 2019 which has been investigated as 5-shares, 15-shares, 25-shares investment portfolios. The ARIMA-GARCH hybrid model was used to generate the scenario in this study. To investigate the effect of different value of lower partial moment measure’s alpha on investment portfolio, some qualitative performance measurement criteria such as the rate of Skewness, Sharpe ratio, Sortino ratio, Trainer ratio and Jensen measure is used. The results show that with the increase of the moment, positive Skewness and Sortino ratio increases as well. And by increasing the moment the Sharp ratio increases too, but the highest amount of that associated with variance risk measure. The highest trainer criterion is obtained when the alpha is three. Jensen's alpha criteria has inverse relation with value of moment, it means that by increasing the value of moment their values will decrease.

Keywords

• multi-period planning
• portfolio optimization
• lower partial moment