The Sortino Ratio and Extreme Value Theory: An Application to Asset Allocation

G. Geoffrey Booth*, John Paul Broussard

*Motsvarande författare för detta arbete

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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.

Titel på värdpublikationExtreme Events in Finance: A Handbook of Extreme Value Theory and its Applications
RedaktörerFrançois Longin
UtgivningsortHoboken, New Jersey
FörlagJohn Wiley & Sons
ISBN (tryckt)978-1-118-65019-6
ISBN (elektroniskt)978-1-118-65031-8
StatusPublicerad - 2017
MoE-publikationstypB2 Del av en bok eller annat samlingsverk


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