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  • Portfolio Selection and Hedge Funds: The Effects of Autocorrelation and Tail Risk

    Author(s)
    J. Bianchi, Robert
    E. Drew, Michael
    E. Clements, Adam
    Griffith University Author(s)
    Bianchi, Robert
    Year published
    2007
    Metadata
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    Abstract
    This paper examines the sensitivities in portfolio selection due to the effects of serial correlation in asset returns. Traditional mean-variance analysis (MVA) and mean-Conditional Value at Risk (M-CVaR) portfolio frameworks are employed on an investment universe of global stocks, world bonds and global hedge funds. The findings reveal that autocorrelation in asset returns tends to induce a downward bias in the second sample moment making hedge funds artificially desirable. This effect is found in both MVA and M-CVaR frameworks. The MVA results show that hedge funds are an attractive asset class for mean-variance investors ...
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    This paper examines the sensitivities in portfolio selection due to the effects of serial correlation in asset returns. Traditional mean-variance analysis (MVA) and mean-Conditional Value at Risk (M-CVaR) portfolio frameworks are employed on an investment universe of global stocks, world bonds and global hedge funds. The findings reveal that autocorrelation in asset returns tends to induce a downward bias in the second sample moment making hedge funds artificially desirable. This effect is found in both MVA and M-CVaR frameworks. The MVA results show that hedge funds are an attractive asset class for mean-variance investors as they lower portfolio volatility at the cost of undesirable third and fourth portfolio moments. Conversely, M-CVaR investors who prefer to minimise the left tail of portfolio returns tend to allocate little to hedge fund investments. Furthermore, M-CVaR investors with a heightened aversion to tail-risk will hold a zero portfolio weighting to hedge funds. These findings are consistent with the notion that the inherent risk in hedge funds is located in the tail of their distribution of returns.
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    Conference Title
    The 7th Global Conference on Business and Economics
    Publisher URI
    http://www.gcbe.us/7th_GCBE/data/confcd.htm
    Publication URI
    http://hdl.handle.net/10072/32640
    Collection
    • Conference outputs

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