Journal of Wealth Management
Vandenbroucke, J. (2016), “Selecting portfolio solutions based on the attitude towards loss”, Journal of Wealth Management. DOI 10.3905/jwm.2016.19.2.032
In a nutshell
Popular classifications of investment solutions focus on variance as a measure for risk. Popular risk-adjusted performance measures rank investment solutions based on the excess return per unit of variance. The current publication shows how such approach overlooks important differentiating product features.
The publication advocates an alternative quantification of risk and reward. Inspired by behavioral finance, reward is linked to performances in excess of a predefined reference while risk is linked to performances below a predefined reference. This alternative view is simple to implement and proves to reveal key differences between investment solutions that otherwise fall within the same risk classification based on variance.