## Abstract

This chapter applies extreme value theory (EVT) techniques when using the Sortino ratio for selecting optimal portfolio weights. The analysis is restricted to two assets for simplicity, with one of the assets being a portfolio of the U.S. real estate investment trusts (REIT) and the other a broad-based portfolio of U.S. equities represented by the S&P 500 stock index. The chapter uses an extensive daily dataset to calculate the Sortino ratio using various two-asset allocation weights. It repeats the calculations after replacing the empirical data by a fitted generalized Pareto distribution (GPD). The chapter compares the Sortino ratio asset allocation results provided by the various scenarios to the portfolio suggested by the Sharpe ratio. The study contributes to two strands of the performance and asset allocation literature. Future research should be directed towards implications of downside risk and notion of a conditional Sortino ratio.

Original language | English |
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Title of host publication | Extreme Events in Finance: A Handbook of Extreme Value Theory and its Applications |

Editors | François Longin |

Place of Publication | Hoboken, New Jersey |

Publisher | John Wiley & Sons |

Publication date | 2017 |

Pages | 443-464 |

ISBN (Print) | 978-1-118-65019-6 |

ISBN (Electronic) | 978-1-118-65031-8 |

DOIs | |

Publication status | Published - 2017 |

MoE publication type | B2 Book chapter |

## Keywords

- 512 Business and Management
- Asset allocation
- Extreme value theory
- Normal distribution overlay
- Pareto distribution
- Real estate investment trusts
- Sharpe ratio
- Sortino ratio
- U.S. equities