Targeted Return Portfolio Construction

Abstract

This seminal work introduces a portfolio construction framework for risk-averse investors that aims to meet, or exceed, a return objective or liability coverage obligation. The author presents Skew-Risk Modeling, a practical application of Targeted Return Portfolio Construction designed to enable the investor to efficiently manage a portfolio that has a target return objective. The innovation of the Liability-Skew Ratio is also presented; it provides the most effective measurement instrument for understanding a portfolio’s risk relative to achieving a target return. Skew-Risk Modeling allows the investor to efficiently manage a portfolio relative to policy, time, upside, and downside risks while pursuing a risk-managed target return objective. The results of the empirical tests are compelling.

TOPICS: Portfolio construction, statistical methods, risk management