Portfolio Diversification Effects of Downside Risk

Namwon Hyung, Casper G. de Vries
2004 Social Science Research Network  
Risk managers use portfolios to diversify away the un-priced risk of individual securities. In this paper we compare the bene...ts of portfolio diversi...cation for downside risk in case returns are normally distributed with the case fat tailed distributed returns. The downside risk of a security is decomposed into a part which is attributable to the market risk, an idiosyncratic part and a second independent factor. We show that the fat-tailed based downside risk, measured as Value-at-Risk
more » ... ), should decline more rapidly than the normal based VaR. This result is con...rmed empirically.
doi:10.2139/ssrn.653064 fatcat:vjzplbfow5e6hiyaymqdzxycwi