Efficient Portfolio Allocation and Risk Management Techniques

Abstract

Instead of focusing on traditional mean-variance optimization, portfolio managers should emphasize risk measures that focus on downside deviations. In this document, I examine three risk measures in particular: the Sharpe ratio, the Sortino ratio, and the Ulcer Performance Index. These three measure the risk-adjusted return of a portfolio, however each uses a different measure of risk. My objective is to examine how each measure performs in different market scenarios: longterm, short-term, and recessionary. Through optimization techniques and sensitivity analysis, I conclude that the Sortino ratio functions as a better measure of risk than the Sharpe ratio and Ulcer Performance Index.