Mean-Modified Value-at-Risk Optimization with Hedge Funds

Laurent Favre Β · José-Antonio Galeano

378 citations0/0 files storedThe Journal of Alternative Investments

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Risk and Portfolio Optimization Stochastic processes and financial applications Financial Risk and Volatility Modeling

Abstract

Based on the normal value-at-risk, we develop a new value-at-risk method called modified value-at-risk. This modified value-at-risk has the property to adjust the risk, measured by volatility alone, with the skewness and the kurtosis of the distribution of returns. The modified value-at-risk allows us to measure the risk of a portfolio with non-normally distributed assets like hedge funds or technology stocks and to solve for optimal portfolio by minimizing the modified value-at-risk at a given confidence level.

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References

1999Coherent Measures of Risk 1952Portfolio Selection 1999The Performance of Hedge Funds: Risk, Return, and Incentives 1991Asset Allocation in a Downside-Risk Framework 1994The empirical nature of Taylor-Series approximations to expected utility

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