Mean-Semivariance Optimization: A Heuristic Approach

Javier Estrada
2007 Social Science Research Network  
Academics and practitioners optimize portfolios using far more often the mean-variance approach than the mean-semivariance approach, and that despite the fact that semivariance is often considered a more plausible measure of risk than variance. The popularity of the mean-variance approach follows in part from the fact that mean-variance problems have well-known closed-form solutions, whereas mean-semivariance optimal portfolios cannot be determined without resorting to obscure numerical
more » ... ms. This follows from the fact that, unlike the exogenous covariance matrix, the semicovariance matrix is endogenous. This article proposes a heuristic approach that yields a symmetric and exogenous semicovariance matrix, which enables the determination of meansemivariance optimal portfolios by using the well-known closed-form solutions of mean-variance problems. The heuristic proposed is shown to be both simple and accurate.
doi:10.2139/ssrn.1028206 fatcat:63xi5omuqjbvtgptiisrjdemem