TITLE:
Analysis of Risk Measures in Portfolio Optimization for the Uganda Securities Exchange
AUTHORS:
Criscent Birungi, Lucy Muthoni
KEYWORDS:
Portfolio Optimization, Risk Measures, Conditional Value-at-Risk, Variance, Uganda Security Exchange
JOURNAL NAME:
Journal of Financial Risk Management,
Vol.10 No.2,
June
7,
2021
ABSTRACT: For the most recent years, risk has become one of the essential parameters in portfolio optimization problems. Today most practitioners and researchers in portfolio optimization have used variance as a standard risk measure. This approach has been found subjective. The Markowitz (1952) mean-variance model considered variance as an adequate portfolio risk measure, and asset returns are multivariate normally distributed and that investors have a quadratic utility function which is subjective too. Other risk measures have been suggested to overcome the limitations of the mean-variance model. This paper analyzes which portfolio optimization models can better explain the optimal portfolio performance (high return, low risk) for the Uganda Security Exchange (USE). We compare Mean-Variance (MV), Mean Absolute Deviation (MAD), Robust Portfolios and Covariance Estimation Models (The Shrinked Mean-Variance (SMV) Models & Alternative Covariance Estimator (ACE) Models) and Mean-Conditional Value-at-Risk (Mean-CVaR) models in terms of the risk and performance. For the computed monthly returns and price data (February 2010 to January 2021) for USE selected stocks, we considered the results to show that Mean-CVaR and ACE portfolios have the highest performance ratio compared to other models. We find that VaR is the best risk measure for portfolio optimization for the USE since it has lower values across all models than other risk measures. It is vital to consider all the available risk measures for a regulator or practitioner to make a good decision since using one can be subjective; as seen in our results, different risk measures yield different results.